MAINTAINING  a  steady  stream  of  quality  production  at  low  cost  is  the  chief  function  of  the 
factory.      At  the  Hart-Parr  plant,  plan  boards  (upper  right),  keep  part  production  regulated 
with  assemblage  (See  Page  58).     At  the  left,  inspection  of  nippers  by  service  test  is  shown.     Below 
is  the  famous  shortage-chasing  department  at  the  Ford  plant 


SHAW  FACTORY  MANAGEMENT  SERIES 

OPERATION  AND 
COSTS 


PLANNING  AND  FILLING  ORDERS— COST-KEEPING 
METHODS—CONTROLLING  YOUR  OPERA- 
TIONS—STANDARDIZING MATERIAL 
AND  LABOR  COSTS 


A.  W.  SHAW  COMPANY 

CHICAGO  NEW  YORK 

LONDON 

1991 


THE  SERIES:  BUILDINGS  AND  UPKEEP;  MACHINERY 
AND  EQUIPMENT;  MATERIALS  AND  SUPPLIES;  LABOR; 
OPERATION  AND  COSTS;  EXECUTIVE  CONTROL. 


Copyright  1915,  by 

A.  W.  SHAW  COMPANY 

Entered  at  Stationers '  Hall,  London 

FBINTED  IN  THE  UNITED  STATES  OF  AMERICA 


CONTENTS 


I-PLANNING  AND  FILLING 
ORDERS 

CHAPTER  PAGE 

I    BRINGING  PRODUCTION  UP  TO  CAPACITY          .        .        11 

Keeping  the  entire  investment  productive  (13) — Analysis  of 
production  suggests  the  best  adjustment  of  work  (15) — How 
to  get  all  the  producing  departments  to  pull  together  (17) — 
Supervising  operation  and  following  up  the  work  (21) 

II    RUNNING  THE  FACTORY  BY  SCHEDULE      ...        23 

Dividing  and  scheduling  the  manufacturing  order  (27) — 
How  many  men  to  employ  (28) — What  sizes  and  styles  to 
make  first  (31) — How  to  run  a  single  department  on  a  sched- 
ule (32) — How  stock  is  supplied  for  filling  orders  on  time  (33) 

III  LAYING  OUT  AND  ROUTING  THE  WORK      ...        35 

Making  it  easier  for  the  workman  to  understand  his  job  (35) — 
How  an  engineering  department  reorganized  to  hold  down 
layout  costs  (36) — The  three  basic  principles  of  efficient 
operation  (45) 

IV  WHAT  QUANTITY  TO  MAKE  AT  ONCE  .        .        .        .        47 

What  length  of  run  is  best  (47) — Calculating  economical  size 
of  lots  under  standard  conditions  (48) — How  the  formula  for 
determining  quantities  works  out  in  practice  (51) 

V    REGULATING  STOCK  PRODUCTION        .        .        .        .        53 

Readjusting  schedules  to  new  demands  (53) — Graphic  systems 
for  controlling  operation  in  factories  making  to  stock  (54) — 
Holding  departments  to  schedule  (60) — How  a  production 
record  gave  one  manager  a  new  grip  on  his  factory  (64) — 
Meeting  the  demands  of  a  heavy  season  (66) 

VI    SPECIAL  AND  MAINTENANCE  ORDER  SYSTEMS          .        70 

Fourteen  principles  that  apply  to  special  orders  (71) — Follow- 
ing work  by  control  board  and  order  coupons  (75) — Pushing 
maintenance  orders  (79)— ^Ascertaining  their  cost  (80) — How 
to  organize  for  personal  follow-up  on  rush  orders  (84) 


4SS587 


CONTENTS 


VII    KEEPING  QUALITY  UP  TO  STANDARD 

How  quality  is  maintained  by  the  National  Cash  Register 
Company  (89) — Inspecting  two  hundred  million  pieces  of 
stock  in  a  year  (90) — Inspection  that  keeps  pace  with  stock 
in  process  (94) — What  to  do  about  the  quality-quantity 
problem  (97) 


II— COST-KEEPING  METHODS 

VIII    FITTING  A  COST  SYSTEM  TO  THE  PLANT    ...      101 

System  versus  red  tape  (102) — Sound  cost  keeping  an  invest- 
ment (104) — Conditions  on  which  cost  control  depends  (104) 

IX    LAYING  THE  BASIS  FOR  ACCURATE  COSTS          .        .      107 

Where  to  begin  in  estimating  the  amount  of  capital  invested 
in  a  plant  (108) — Taking  actual  inventory  with  the  least  labor 
and  expense  (112) — How  to  figure  depreciation  (117) 

X    COMPILING  FIXED  CHARGES 119 

What  are  fixed  charges  (120) — How  to  put  a  fair  burden  of 
fixed  charges  on  each  unit  of  output  (121)— Getting  at 
charges  which  must  be  estimated  on  a  value  basis  (125) 

XI    EXPENSE  ANALYSIS  AND  DISTRIBUTION      ...      126 

How  to  assemble  departmental  costs  (129) — Problems  in- 
volved in  the  distribution  of  factory  general  expense  (131) — 
How  to  distribute  indirect  expense  to  the  direct  cost  of  the 
product  (134) 

XH    COLLECTING  MATERIAL  AND  LABOR  COSTS        .        .      138 

Getting  the  cost  of  direct  and  indirect  materials,  waste  and 
scrap  (139)— Collecting  labor  costs  daily  (144)— The  job 
time  ticket  as  an  aid  to  efficient  cost  keeping  (149) 

XIII  FINDING  THE  TOTAL  COST  OF  THE  PRODUCT    .        .      151 

Assembling  all  costs  involved  in  processing  materials  (152) — 
How  to  keep  costs  on  single  lots  and  on  a  steady  run  of  work 
(156) — Summary  forms  for  collecting  costs  on  parts  and  on 
the  complete  product  (158) 

XIV  PROVING  COST  TOTALS  WITH  THE  BOOKS  ...      161 

How  production  costs  close  into  the  controlling  accounts  (162) 
— -Distributing  productions  costs  through  the  charge  register 
(169)— Working  out  the  balance  sheet  (170)— Financial 
statements  and  bulletins  covering  production  (171) 


III— USING  COST  DATA  TO  CONTROL 
OPERATIONS 

XV    WHAT  COSTS  SHOULD  TELL  THE  MANAGER        .        .      175 

How  to  determine  a  sound  expense  ratio  to  apply  in  cal- 
culating costs  (176) — Charting  costs  into  picture  writing  for 
purposes  of  control  (177) — When  the  manager  shows  cost 
favoritism  (179) 


CONTENTS 


XVI    STANDARDIZING  MATERIAL  AND  LABOR  COSTS         .      185 

How  to  separate  standard  from  abnormal  material  costs  (186) 
Where  to  charge  premium  wages  (189) — What  to  do  with  set- 
up costs  and  allowances  for  inadequate  equipment  (191) 

XVII    STANDARDIZING  EXPENSE      .'";.'       .        .        .        .      193 
Ways  to  charge  and  control  expense  materials  (194) — Cutting 
down  spoilage  and  controlling  waste  (196) — Bringing  expense 
labor  under  control  (201) — How  more  output  cuts  costs  and 
reduces  the  ratio  of  burden  (203) 

XVIII    HOW  TO  ESTIMATE  ON  WORK 205 

How  to  organize  and  man  the  estimating  department  (206) — 
Accurate  cost  data  files  underlie  accurate  estimates  (208)-— 
Steps  in  making  the  estimate  (212) 


PLATES 

Getting  Effective  Operation  at  Lowest  Cost 
Scheduling  Work  in  a  Production  Department 
Production  Control  in  Office  and  Shop 

Routing  the  Work 

How  Foremen  File  Shop  Orders 

Regulating  Stock  Production 

Planning  Boards  That  Assist  Operation 

Maintaining  Maximum  Output    . 

Despatching  Work  from  a  Central  Station 

Inspection  All  Along  the  Line     . 

Cost  Accounting  by  Machines     . 

Laying  a  Basis  for  Accurate  Costs 

Getting  Costs  for  the  Manager 

How  to  Standardize  Material  and  Labor  Costs 

Cutting  Down  Expense       .... 

Fitting  Up  an  Estimating  Department 


FORMS 


I 

II 
III 
IV 

V-VII 

VIII 

IX-X 

XI-XV 

XVI-XXVII 

XXVIII-XXX 

XXXI 

XXXII 

XXXIII-IV 


Frontispiece 
19 
20 
87 
38 
55 

Frontispiece,  55,  56,  73 

.  74,  91 

92 

109,  110 

127,  128 

.   145 

.   146 

163,  164,  181 

182,  199 

200 


Machine  Erecting  Schedule 25 

A  Calendar  of  Working  Days 26 

Getting  the  Labor  Cost  in  Advance  ....  26 
An  Analysis  of  One  Machine's  Output  ...  27 
Operating  and  Storekeeping  Records  ....  29 
Standardizing  Instructions  for  the  Operator  .  .  41 
A  Complete  History  of  One  Shop  Order  '  .  .42,  43 
Watching  Production,  Stock  and  Shipments  .  58.  61.  63 
Records  Necessary  for  Special  Orders  ...  76 
Tracing  the  Movement  of  Pieces  .  .  .  .  77, 78 
Construction  and  Repair  Order  Cost  ...  81 
Combining  Order  and  Routing  Tag  ....  82 
A  Follow-up  for  Rush  Orders 85 


CONTENTS 


XXXV-IX  How  to  Insure  Quality          .         .         .'        .         .     90,94,95 

XL-Ill  Taking  a  Plant  Inventory      .         ,         .       j9         .        113,  115 

XLIV-V  Compiling  Fixed  Charges       .         .         .         .         .         .123 

XLVI  Departmental  Expense  Analysis     ....         132,  133 

XLVII-LIV  Collecting  Material  and  Labor  Costs     .         .  141.  143,  147,  148 

LV-LXIII  How  to  Summarize  Costs      ....         .  153,  154,  155,  157 

LXIV-IX  Proving  Cost  Totals      .         .         .         ;         .         .        167, 168 

LXX  Reporting  Defective  Castings          ...         .         .       202 

LXXI-IV  Estimates  on  New  Work  .         .  207.  210,  211,  213 


FIGURES 

I  Estimating  Production  on  Probable  Sales     . 

II  Laying  Out  the  Work          .... 

Ill  Blank  Blueprints  That  Help  to  Cut  Costs     . 

IV-V  How  Size  of  Lot  Affects  Costs     .         . 

VI  What  Goes  into  the  Selling  Price         .    •  ... 

VII  Mapping  Out  a  Foundry  Cost  System 

VIII  Absorbing  the  Expense  of  Indirect  Departments 

IX  How  to  Classify  Controlling  Accounts 

X  Records  in  a  Cost-keeping  System 

XI  Where  Manufacturing  Becomes  Unprofitable 

XII-XIII  How  Graphs  Help  in  Controlling  Costs 

XIV  Cutting  Down  Departmental  Expense 

XV  Placing  the  Cost  of  Forty-two  Casting  Defects 

XVI  Cause  and  Prevention  of  Bad  Work     . 

XVII  Actual  and  Estimated  Cost  Comparison 


24 

39 

40 

50 

103 

105 

130 

162 

166 

179 

187 

195 

197 

202 

214 


Part  I 

PLANNING  AND  FILLING 
ORDERS 


AUTHORITIES  AND  SOURCES 
FOR  PART  I 


Chapters  I  and  II.  Written  in  collaboration  by  Mr.  Dennis* 
Mr.  Murphy  and  Mr.  Porter. 

Much  of  the  material  for  Chapter  I  was  contributed  by 
Clinton  E.  Woods,  electrical  and  mechanical  engineer  and  con- 
sulting expert,  and  Hugo  Diemer,  professor  of  industrial  engineer- 
ing, Pennsylvania  State  University. 

Material  for  Chapter  II  was  supplied  by  Robert  Daily  of  the 
Mitchell-Lewis  Motor  Company  and  formerly  works  office  man- 
ager of  the  J.  I.  Case  Threshing  Machine  Company. 

Chapter  III.  Contributed  by  Mr.  Porter.  Among  the 
factories  from  which  points  have  been  drawn  are  those  of  Clark 
Brothers,  Belmont,  N.  Y.,  Westinghouse  Electric  &  Manufactur- 
ing Company,  Tabor  Manufacturing  Company,  and  Felt  & 
Tarrant  Manufacturing  Company . 

Chapter  IV.  Contributed  by  Ford  W.  Harris,  consulting 
engineer,  formerly  with  the  Westinghouse  Electric  &  Manufac- 
turing Company. 

Chapter  V.  Contributed  by  Mr.  Porter  from  his  experience 
and  investigations,  in  collaboration  with  Mr.  Dennis.  Plants 
from  which  material  has  been  drawn  are  the  Hart-Parr  Com- 
pany, Franklin  Automobile  Company,  Cincinnati  Shaper  Com- 
pany, Rathbone,  Sard  &  Company,  Thomas  B.  Jeffery  Com- 
pany, Home  Furniture  Company.  York,  Pa.,  Kohler  Company, 
and  others. 

Chapter  VI.  Written  by  Mr.  Porter  and  based  on  his  own 
work,  together  with  material  supplied  by  Homer  E.  Dunbar, 
assistant  chief  engineer,  Norton  Grinding  Company.  The  expe- 
rience of  the  following  plants,  among  others,  is  indicated:  Nor- 
ton Grinding  Company,  Kohler  Company,  Seymour  Manufactur- 
ing Company,  Detroit  Lubricator  Company,  a  New  England 
machine  shop,  an  eastern  company  manufacturing  parts,  and  an 
Indianapolis  saw  company. 

Chapter  VII.  Contributed  by  Mr.  Feiker  in  collaboration 
with  Mr.  Dennis.  Material  was  supplied  by  Mr.  Feiker,  Guy 
Cramer,  C.  B.  Auel  of  the  Westinghouse  Electric  &  Manufactur- 
ing Company,  H.  M.  Wilcox,  formerly  of  Miller,  Franklin  & 
Company,  Ford  W.  Harris,  and  the  National  Cash  Register 
Company. 


I 


BRINGING  PRODUCTION 
UP  TO  CAPACITY 


THREE  hundred  thousand  dollars  had  been  invested  by  a 
manufacturer  in  equipment.  His  plant  was  in  good  con- 
dition, his  bosses  and  workmen  were  efficient  and  diligent. 
An  increase  in  demand  for  his  product  pointed  the  need  for  more 
equipment  to  the  extent  of  one  hundred  and  twenty  thousand 
dollars. 

His  plant,  however,  was  centrally  located  in  a  large  city  where 
every  inch  of  space  apparently  was  occupied.  In  order  to  handle 
the  additional  business,  expansion  seemed  inevitable;  and  to 
expand  meant  to  move. 

At  this  stage  he  visited  another  factory  and  saw  something  of 
what  could  be  done  by  accurately  planning  and  scheduling  work. 
So  well  did  the  new  way  promise  that  he  decided  to  try  it,  and  to 
that  end,  employed  an  outside  engineer. 

Orders  previously  had  gone  through  from  the  front  office  di- 
rectly to  the  foreman  concerned.  Each  boss  with  his  men  had 
used  their  judgment  and  experience  in  carrying  out  their  details 
of  the  work.  No  standard  way  of  doing  anything  was  recog- 
nized. Men  came  and  went  in  every  department.  A  job  well 
done  one  week  by  a  skilled  man  might  be  indifferently  handled 
the  next  by  a  less  capable  workman. 

Within  six  months,  however,  acting  on  the  advice  of  the 
specialist,  the  manufacturer  had  increased  his  output  about  one- 
third.  Some  individual  machines  were  doing  double  work, 
others  twenty-five  to  thirty  per  cent  more.  These  changes, 
chiefly  in  feeding  the  work  into  the  operating  departments,  had 
cost  him  twenty  thousand  dollars;  but  they  saved  him  outright 


12  rilODLCTlON  METHODS 

the  expense  of  moving  and  were  earning  increased  net  profits 
every  day. 

Managers  are  likely  not  to  realize  the  amount  of  lost  motion 
involved  in  getting  out  their  products  until,  like  this  manu- 
facturer, they  face  some  test.  Then  it  becomes  evident  that  the 
only  logical  way  is  to  centralize  the  authority  and  responsibility 
for  making  maximum  use  of  plant  capacity. 

Production  is  simply  a  change  in  the  form  of  materials.  This 
change,  of  course,  involves  planning,  operation  and  search  for 
more  improved  methods.  When  in  the  simple  types  of  organ- 
ization the  workmen  had  to  plan  their  jobs,  get  their  own  ma- 
terials and  tools,  figure  how  long  each  task  should  take  and 
which  to  do  first,  and  keep  their  own  time  for  cost-finding  pur- 
poses, they  failed  individually  to  do  themselves  justice  and  were 
unable  to  work  together  in  a  truly  organized  way.  So  produc- 
tion and  cost  finding  under  the  leadership  of  such  men  as 
Frederick  W.  Taylor  has  been  specialized  at  every  step.  Some- 
one has  been  relieved  from  the  grind  of  forcing  output  and 
delegated  to  the  task  of  betterment.  The  foremen  and  workmen 
also,  generally  speaking,  have  been  freed  from  material  chasing 
and  from  deciding  and  remembering  what  to  do  next  and  how 
to  do  it.  All  the  planning  and  follow-up  duties — the  general- 
ship of  getting  materials,  tools  and  supplies  to  the  machines  and 
the  workmen  in  single  file  at  the  proper  rate  of  flow  and  bring- 
ing back  cost  data  for  the  use  of  the  sales  department  and  the 
betterment  men — have  been  centralized  in  a  production  or  plan- 
ning department.  Instead  of  having  each  foreman's  office  a 
plan  room  unrelated  to  that  of  any  other  foreman,  the  work  is 
distributed  evenly  from  one  office  and  the  duties  of  follow-up 
and  record  are  focused  at  that  point. 

The  workman's  duty,  for  which  he  is  now  trained,  is  to  do 
what  is  put  before  him  at  the  rate  and  in  the  way  which  has 
proved  best.  The  improvement  man's  task  is  to  find  and  set  up 
better  standards.  The  production  department  is  expected  to  take 
the  requirements  of  the  sales  department  and  match  them  as 
closely  as  possible  with  the  capacity  of  the  plant  so  as  to  keep 
the  entire  investment  busy ;  to  time  and  place  every  operation ; 
to  work  out  and  indicate  how  it  is  to  be  done ;  to  make  sure  that 
everything  is  on  hand  to  do  it,  and  thus  avoid  the  cost  of  delays ; 


CAPACITY  OUTPUT IS 

and  so  to  assure  a  product  the  cost  of  which  is  known  and  is 
standard,  the  quality  of  which  is  right,  and  which  is  ready  for 
delivery  on  time.  From  the  costs  which  the  production  depart- 
ment's order  forms,  material  requisitions  and  time  cards  enable 
it  to  tabulate,  moreover,  the  staff  men  get  indications  which 
help  them  in  finding  ways  to  'improve  quality  or  cut  costs. 

To  standardize  the  product  as  far  as  feasible  has  long  been  a 
practice  among  manufacturers,  and  interchangeable  parts  are 
an  ear-mark  of  American  machinery.  Management  is  now  ac- 
cepting the  opportunity  thus  presented  and  is  doing  the  same 
thing  for  processes.  In  the  most  advanced  organizations,  it  is 
subdividing  factory  work  until  each  task  is  elementary  and  can 
be  done  in  a  standard  way.  No  matter  how  labor  may  shift 
under  ordinary  conditions,  the  work  will  be  done  in  practically 
the  same  way,  with  the  same  accuracy  and  at  the  same  rate.  In 
this  fashion,  it  is  taking  the  whole  production  order  to  pieces, 
and  so  timing  and  distributing  the  tasks  that  they  will  be  fin- 
ished simultaneously,  ready  for  assembling  at  a  previously  fixed 
date. 

HOW  WORK  CAN  BE  ADJUSTED  TO  KEEP  THE  ENTIRE 
INVESTMENT  PRODUCTIVE 

O  INGE  each  unit  of  product  has  to  bear  its  share  of  interest  on 
the  entire  manufacturing  investment,  an  idle  machine  al- 
ways spells  excessive  costs.  If  some  departments  operate  over- 
time while  others  idle,  with  the  shift  of  the  rush  of  work  from 
the  first  to  the  second  department  at  different  seasons,  poor  dis- 
tribution of  tasks  is  even  more  evident.  Figures  representing 
idle  investment  in  unused  tools  and  equipment  in  any  state  or 
section,  if  they  could  be  obtained,  would  be  startling. 

Lack  of  demand  or  failure  to  find  buyers  at  the  proper  time  is, 
of  course,  often  at  the  bottom  of  the  trouble.  But  much  equip- 
ment, labor  and  material  lie  idle  because  adjoining  departments 
are  not  so  geared  up  as  to  produce  a  uniform  stream  of  work. 
While  one  machine  or  department  is  gorged,  another  starves. 
In  correcting  these  conditions,  many  problems  of  policy  are 
encountered. 

One  plant  had  a  total  investment  of  eight  hundred  thousand 


14 PRODUCTION  METHODS 

dollars  and  yielded  a  net  annual  output  valued  at  nine  hundred 
thousand  dollars.  Some  of  the  departments  and  machine  tools 
at  certain  seasons  ran  overtime  and  night  shifts,  while  others 
operated  only  nine  hours  a  day  and  many  were  not  used  on  an 
average  three  days  a  week.  The  dividends,  of  course,  were 
actually  produced  by  the  average  investment  in  use,  and  diluted 
by  the  percentage  of  the  capital  idle. 

Fortunately  for  this  company  it  was  supplying  only  about 
six  per  cent  of  the  total  market  in  its  line.  With  this  oppor- 
tunity; before  them,  specialists  undertook  to  bring  output  in  the 
lagging  departments  up  to  an  even  level  with  the  most  produc- 
tive ones.  They  first  made  a  careful  analysis  of  the  product  by 
operations,  followed  by  a  detailed  study  of  each  machine  and 
its  capacity.  Some  of  the  machines  they  found  to  be  so  crowded 
that  for  eighteen  months  they  would  not  reach  work  which  was 
promised  within  the  year.  Others  were  so  numerous  or  had 
such  capacity  that  they  could  have  done  in  four  or  five  months 
all  that  they  were  delivering  in  twelve. 

What  machinery  should  be  bought  in  order  to  secure  level 
capacity  and  keep  all  the  tools  busy  all  the  time,  was  the  first 
problem.  What  output  could  be  obtained  after  so  doing,  was 
the  next,  in  which  the  sales  offices  were  no  less  interested  than 
the  factory.  To  answer  these  questions  took  the  time  of  several 
men  for  many  weeks  and  cost  the  concern  about  fifteen  thousand 
dollars.  But  the  results  warranted  the  expenditure  several  times 
over.  It  put  the  plant  in  balance.  Some  sixty-nine  thousand 
dollars'  worth  of  new  equipment  was  installed.  With  this  ma- 
chinery to  relieve  the  pressure  in  departments  which  had  usually, 
kept  others  waiting,  it  was  estimated,  the  output  would  be  one 
million,  five  hundred  thousand  dollars. 

Sixty-nine  thousand  dollars  in  new  investment  thus  served  to 
duplicate  two-thirds  of  the  output  derived  from  an  earlier  in- 
vestment of  eight  hundred  thousand  dollars.  Nor  was  either 
overtime  or  night-shift  work  involved  in  this  result.  The  busi- 
ness had  simply  been  over-invested  by  three  hundred  thousand 
dollars,  which  capital  could  have  been  made  active  by  a  small 
additional  expenditure.  And  this  lack  of  balance  in  equipment 
is  the  condition  in  hundreds  of  plants  today. 

In  every  such  situation  the  first  step,  of  course,  is  to  plan  and 


CAPACITY  OUTPUT 15 

schedule  the  production— -to  make  use  of  the  entire  investment 
all  the  time.  Not  always,  however,  is  the  solution  so  simple 
and  gratifying  as  in  this  instance.  Limited  markets  often  make 
it  exceedingly  dangerous  to  counteract  over-investment  by  bal- 
ancing up  in  equipment  and  throwing  more  product  upon  the 
sales  department.  An  industrial  engineer  narrowly  averted  a 
disaster  of  this  kind  recently  in  a  plant  manufacturing  machine 
tools. 

After  spending  forty  years  in  building  the  business  up  to  a 
million-dollar  output,  its  founder  had  left  it  to  his  two  sons.  It 
had  always  paid  handsome  dividends — originally  because  of  cer- 
tain patents  and  later  because  of  high  reputation  in  the  trade. 
About  six  hundred  thousand  dollars  was  invested  in  it.  Eager  to 
forge  ahead,  the  sons  contemplated  putting  up  new  buildings  and 
spending  in  all  about  four  hundred  thousand  dollars  additional, 
most  of  which  they  expected  to  borrow.  A  specialist  was  engaged 
to  cooperate  in  planning  the  expansion. 

"What  percentage  of  your  market  do  you  supply  with  your 
particular  line?"  he  immediately  inquired. 

Both  young  men  confessed  their  ignorance  on  this  point.  At 
his  suggestion,  a  search  of  records  all  over  the  country  followed, 
including  the  government  offices  at  Washington.  The  result 
was  startling;  sixty-three  per  cent  of  the  demand  in  their  par- 
ticular line  was  already  theirs.  To  expand  their  sales  ten  per 
cent  further,  the  specialist  advised,  was  the  maximum  the  firm 
could  expect,  regardless  of  increased  efforts. 

So  the  first  calculations  involved  in  putting  all  the  shop  to 
work  all  the  time  and  regularizing  operation  throughout  the 
year,  concern  the  sales  department  no  less  than  the  factory.  It 
is  the  meeting  ground  of  demand  and  supply.  Fixing  dates  and 
schedules  for  production  must  be  done  by  the  two  departments 
in  cooperation. 

ANALYSIS  OF  PRODUCTION  SHOWS  THE  FACTORY 
WHAT  IT  CAN  DO  BEST 


OUCH  an  analysis  further  involves  trade  questions  when  it 

takes  up  standard  and  special  products  and  varieties  of 

goods.  /Production  naturally  divides  into  standard  and  special 


16 PRODUCTION  METHODS 

work.  An  automatic  screw  machine  in  a  big  plant  may  operate 
for  a  year  on  one  size  and  type  of  screw;  a  bench  hand  in  a 
neighborhood  shop  may  never  have  two  jobs  alike.  And  be- 
tween these  extremes  of  absolutely  standard  and  entirely  special 
work  every  factory  finds  its  place.  It  may  make  one  uniform 
product  composed  of  standard  parts,  or  a  variety  of  products 
made  up  of  either  standard  or  special  units  or  both  in  combina- 
tion. All  that  is  necessary  to  success  is  that  it  do  work  for 
which  there  is  a  demand,  and  through  monopoly  rights  and  a 
clear  field,  enviable  quality,  or  low  costs,  get  a  profitable  price 
for  it.  "Whether  or  not  competition  forces  close  watch  on  manu- 
facturing costs,  to  centralize  the  planning  and  control  will  cut 
present  costs  and  thus  pay  dividends. 

So  the  trend  is  undoubtedly  towards  standard  production, 
through  which  the  one-time  cost  of  plant,  equipment  and  set- 
ups is  distributed  over  more  units  of  product.  From  this  view- 
point, many  factories  make  two  or  three  times  the  variety  they 
should  for  the  volume  they  put  out.  They  ' '  set  up  "  and  * '  knock 
down*'  machine  tools  so  often  that  their  costs  on  every  line  mark 
it  as  a  special  and  the  workmanship  is  often  inferior.  Spoiled 
work  and  excessive  investment  in  small  tools  further  hamper 
their  ability  to  compete  in  the  market,  while  the  time  lost  from 
actual  production  greatly  restricts  possible  output.  In  such 
instances,  the  remedy  is  to  do  a  few  things  well ;  and  production 
analysis  points  the  way. 

Eighty-nine  items  were  regularly  made  by  one  concern,  the 
net  annual  profits  of  which  averaged  five  and  a  half  per  cent. 
A  study  of  the  production  and  costs  showed  that  many  of  the 
items  had  small  sales  and  were  profitless.  In  some  cases,  the 
article  was  being  handled  at  a  loss.  A  schedule  was  then  made 
out.  The  number  of  items  was  reduced  from  eighty-nine  to 
fifty-six  and  all  departments  were  put  on  long  runs.  So  greatly 
did  this  change  decrease  production  costs  that,  notwithstanding 
some  reduction  in  sales  prices,  the  plant  paid  a  profit  of  eleven 
and  a  half  per  cent  the  next  year.  This  reduction  in  sales  prices 
made  possible  by  reduced  costs  also  gave  the  articles  such  an 
advantage  in  the  market  that  the  volume  of  business  more  than 
doubled,  again  making  possible  additional  economies  in  manu- 
facture. 


CAPACITY  OUTPUT 17 

In  making  any  units  of  small  value  it  is  especially  important 
for  the  production  heads  to  analyze  their  facilities  and  focus 
on  the  things  they  can  do  best.  One  concern  manufactured 
about  a  thousand  varieties  of  buttons.  When  the  cost  of  irregu- 
larities in  operation  were  summed  up,  nearly  six  hundred  kinds 
showed  no  profit.  With  the  planning  and  scheduling  of  pro- 
duction, some  three  hundred  profitless  varieties  began  to  pay 
and  another  three  hundred  sorts  were  abandoned. 

Forty  to  fifty  per  cent  of  the  manufacturers  in  the  middle 
ratings  are  struggling  with  a  variety  of  output  too  great  for  their 
volume  of  sales.  Managers  of  such  concerns  are  merchants 
rather  than  manufacturers;  the  selling  end  of  the  business  is 
using  the  factory  as  its  servant  without  regard  to  true  costs  or 
full  use  of  equipment.  As  compared  with  competitors  who 
specialize,  costs  run  too  high  for  the  quality  produced.  The 
factory  is  out  of  balance.  Many  of  the  largest  and  most  profit- 
able plants  are  built  upon  the  program  of  small  variety  and 
large  volume.  Over  against  this,  a  policy  of  large  variety 
necessitates  small  output  and  high  prices,  and  so  invites  cut- 
price  competition  from  producers  who  are  willing  to  chance 
production  in  larger  quantities.  Sales  managers  sometimes  have 
the  idea  that  the  larger  the  variety  of  items  they  have  to  sell, 
the  better  they  can  control  the  market.  Matched  against  this 
point,  however,  is  the  powerful  lever  of  low  prices  on  standard 
lines.  Standardized  production  has  changed  loss  to  profit  in 
many  plants  which  optional  styles  and  special  contracts  were 
rapidly  carrying  toward  the  rocks. 

To  simplify  the  order  work,  cut  out  profitless  varieties  and 
options,  take  up  lost  motion,  relieve  manager  and  office  men  from 
constant  friction  with  the  manufacturing  departments,  and  assist 
the  foremen  to  keep  their  work  in  shape;  to  get  accurate  time 
and  cost  returns ;  to  avoid  delays  and  failures  to  discover  short- 
ages or  incompleteness  before  shipping  date;  to  know  and  use 
the  shop's  full  capacity  constantly,  and  to  give  the  sales  staff 
the  lever  of  low  prices  in  such  cases  as  these  is  a  reasonable 
expectation  from  properly  organized  production. 

In  reorganizing  the  work  of  the  factory  for  positive  promises 
and  prompt  deliveries,  the  first  step,  after  lopping  off  special 
work  and  standardizing  the  product  as  far  as  seems  wise,  is  to 


18 PRODUCTION   METHODS 

determine  exactly  what  labor,  equipment  and  materials  are  at 
hand,  on  what  work  broadly  they  are  to  be  used  and  what  condi- 
tions are  necessary  to  give  a  smooth  stream  of  work  which  will 
keep  all  the  forces  steadily  busy.  A  concern  may,  for  example, 
manufacture  electric  motors,  of  which  there  are  ten  different 
sizes.  Three  or  four  years'  experience  has  perhaps  shown  the 
average  sale  of  each  size  to  be  one  thousand  annually.  In  normal 
times  the  natural  thing  then  would  be  to  schedule  ten  thousand 
motors  as  the  task  for  the  next  year,  with  a  leeway  of  perhaps 
two  months  for  increased  trade. 

With  this  information,  the  heads  of  production  make  a  com- 
plete analysis  of  the  contemplated  output  as  to  different  models, 
have  all  possible  parts  standardized  and  the  operations  to  be 
done  upon  each  laid  out,  calculate  the  quantities  to  be  made  each 
month  and  week,  distribute  the  work  over  the  forces  available 
and  supply  the  new  equipment,  material  and  men  required  for 
even  production.  They  then  set  a  schedule  for  each  piece,  with 
the  aim  of  having  so  many  motors  ready  for  assembling  and 
completed  each  week. 

If  the  labor  costs  are  available  from  past  experience,  the  re- 
quired labor  in  wages  and  men  is  easily  calculated.  The  total 
number  of  hours  allotted  to  the  work,  divided  by  the  number  of 
working  days  and  hours  indicates  how  many  men  to  employ, 
and  gives  a  basis  for  regularity  in  employment,  with  which  labor 
costs  in  the  long  run  are  so  closely  concerned.  Amounts  of 
material  to  be  bought  and  dates  of  material  delivery  are  also 
on  record  or  to  be  calculated.  From  these  two  factors  the  man- 
agement gets  a  third  schedule  suggesting  the  financial  require- 
ments on  various  future  dates — a  matter  of  special  importance 
to  concerns  that  invest  heavily  for  a  short  sales  season. 

This  commonsense  analysis  of  what  is  to  be  done  toward  the 
efficient  distribution  of  tasks  is  the  starting  point  for  the  man- 
ager in  reorganizing  the  operation  of  his  plant.  In  some  in- 
stances engineering  and  mathematics  are  required;  in  others, 
nothing  more  than  arithmetic  and  foresight.  In  the  thousands 
of  plants  which  work  to  special  order  chiefly,  the  problem  is 
difficult,  but  has  repeatedly  been  solved  by  readjustment  of  lines, 
discontinuance  of  the  less  popular  specials,  development  of 
manufacture  to  stock  and  closer  cooperation  with  the  sales  de- 


II 


111 

t& 

l 


! 

It! 


I 


i 


o 


I! 


Accurate  records  of  production  must  be  kept  at  the  manager's  desk  and  at  the  machine.     In  the 

manager's  office  of  a  stove  company  (above),  the  supply  of  material  is  kept  three   weeks  ahead  of 

demand  by  means  of  the  schedule  shown  (See  Chapter  V).     Under  scientific  management,  orders, 

drawings  and  instruction  cards  are  taken  to  each  workman  before  the  previous  job  is  finished 


CAPACITY  OUTPUT 21 

partment  on  the  special  work.  The  result  in  every  case  is  a 
better  perspective  over  the  work  of  the  season  ahead  and  a  grasp 
upon  the  task  day  by  day.  The  production  superintendent  knows 
as  fully  as  trade  conditions  will  permit  what  the  output  shall 
be  by  kind  and  size.  Pieces  and  operations  are  standardized. 
Equipment  and  tools  are  balanced  in  quantity  and  standard- 
ized as  to  speeds,  feeds,  maintenance  and  supply.  The  purchase 
and  delivery  of  materials  is  scheduled.  The  labor,  finally,  is 
assigned.  The  chief  of  production  becomes  a  commander  of 
known  forces. 

HOW  THE  WORK  OF  PRODUCTION  IS  SUPERVISED 
AND  FOLLOWED  THROUGH 

T  N  the  planning  of  this  master-schedule,  the  heads  of  the  busi- 
ness are  concerned.  The  routine  of  carrying  it  out  and  shap- 
ing it  to  day-by-day  sales  and  emergencies  usually  rests  upon 
the  production  or  planning  department.  Standards  are  fur- 
nished to  this  department  by  the  improvement  men.  On  the 
basis  of  these  standards,  the  chief  production  clerk  dates  up  the 
detailed  schedules  for  work.  When  the  time  and  rate  have  thus 
been  determined,  production  clerks  indicate  on  each  order  how 
the  work  is  to  be  processed  and  routed  from  machine  to  ma- 
chine, and  dispatch  the  orders  in  proper  succession.  Foremen 
and  executives  are  left  free  to  do  their  real  work.  Reversing 
the  old  order,  every  man  has  a  task  ahead  instead  of  being 
expected  to  hunt  for  another  when  one  is  completed.  Each  order 
takes  care  of  the  material  and  tools  involved  in  its  execution,  so 
that  the  different  elements  are  assembled  at  each  focal  point  at 
the  proper  time,  no  matter  how  far  one  or  another  element  comes. 
The  production  department  also  handles  the  follow-up  on  orders 
and  becomes  a  clearing  house  for  all  records  and  statistics  as 
to  progress  on  jobs  and  the  capacity  of  the  plant  to  handle  more 
work.  It  further  receives  and  controls  the  finished  stock,  and 
collects  the  information  from  which  costs  and  closer  control 
develop. 

How  much  of  the  work  can  be  scheduled  far  ahead  and  re- 
duced to  a  smooth  routine  depends  on  the  character  of  the 
product ;  whether  manufacture  is  to  stock,  what  trade  conditions 


PRODUCTION   METHODS 


are  and  what  emergencies  appear.  As  unexpected  orders  come 
in  and  machines,  materials  or  men  fail  to  keep  to  schedule,  the 
chief  production  clerk  acts  as  a  balance  wheel  hour  by  hour, 
finding  a  place  for  new  orders,  assigning  more  work  to  machines 
and  men  unexpectedly  idle,  untangling  tieups,  and  maintaining 
an  even  flow  of  production. 

In  all  this  work,  to  which  the  following  chapters  will  be  given, 
the  division  of  duties  in  (1)  planning,  (2)  operating  and  (3) 
betterment  prevails;  and  the  central  principle  to  which  the  or- 
ganization is  molded  is,  through  foresight,  as  nearly  as  possible 
to  keep  all  the  investment  busy  all  the  time  in  the  most  profitable 
lines  of  manufacture. 


II 


RUNNING  THE  FACTORY 
BY  SCHEDULE 


FAILURE  to  schedule  the  work  in  the  factory  has  not  been 
due  to  lack  of  effort;  a  nicely  ordered  schedule  has  been 
the  ideal  of  many  managers.  But  the  problem  has  often 
seemed  too  intangible  to  warrant  organized  effort.  The  daily  or 
weekly  conference  of  office  and  shop  executives  ran  through  the 
orders,  secured  dates  from  different  foremen  and  blocked  out 
the  work  ahead.  But  conditions  were  not  standard,  foremen 
rarely  knew  either  the  capacity  of  their  men  and  machines  or 
the  detailed  requirements  of  the  order,  and  the  schedule  stood 
for  little  more  than  the  output  the  meeting  hoped  to  reach. 
When  one  or  another  department  found  that  materials  or  sup- 
plies had  not  been  provided,  or  for  other  reasons  failed  to  make 
its  dates,  the  management  either  accepted  the  situation  to  the 
detriment  of  the  whole  policy  of  scheduling  or  grew  impatient 
and  began  to  force  the  work  in  a  way  which  merely  made  more 
trouble. 

At  the  basis  of  such  disorder  is  the  fact  that  shop  capacity 
is  not  known.  Once  the  capacity  of  every  department  is  deter- 
mined, and  brought  up  to  the  point  where  it  can  keep  pace  with 
the  others,  with  a  little  leeway  for  safety,  it  is  merely  a  matter 
of  calculation  to  forecast  deliveries,  distribute  the  work  evenly 
and  supply  the  materials,  tools,  machines  and  men  when  and 
where  needed. 

In  the  most  advanced  shop  practice,  it  is  the  business  of  the 
production,  or  planning  department,  to  know  scientifically,  by 
machine  ratings  and  time  studies,  just  what  the  shop's  capacity 
is,  and  to  date  up  and  lay  out  the  work  accordingly.  No  one 


PRODUCTION   METHODS 


type  of  planning  department  is  prescribed  for  factories  of  all 
kinds.  There  is  the  fully  centralized  planning  section  working 
as  a  unit  under  the  scientific  scheme  of  management  in  intricate 


FIGURE  I:  Fluctuations  in  the  annual  gross  sales  of  one  machine  (Line  No.  1)  and  the  percent- 
age ratio  which  each  size  and  style  of  that  machine  bears  to  the  total  gross  sales  are  shown  in  this 
figure.  Lines  2  to  9  are  made  up  from  past  sales  and  future  predictions.  Line  No.  1  is  the  basis  for 
estimated  requirements  and  the  manufacturing  order  and  is  plotted  from  the  actual  sales.  The 
waved  line  represents  the  sales  manager's  judgment  for  future  sales  based  upon  those  of  preceding 
years  and  general  trade  conditions 

industries  such  as  the  making  of  machine  tools.  Another  type 
centralizes  the  making  of  general  schedules,  but  has  subsidiary 
production  stations  in  each  main  department  to  do  the  detail 
scheduling,  routing  and  follow-up  at  that  point.  In  some  plants 
where  the  manufacture  is  less  intricate,  the  detail  planning  may 
still  be  left  in  the  hands  of  the  foreman,  with  good  results. 

For  the  production  department,  independent  of  the  investi- 
gators who  help  to  determine  plant  and  machine  capacity,  the 
organization  in  any  case  is  simple.  The  chief  production  clerk 
must  have  a  clear  head  as  well  as  initiative  and  determination. 
He  works  with  the  superintendent  of  production  and  the  sales 
manager  on  the  major  schedules,  as  well  as  directs  operation 
day  by  day.  With  him  are  associated  as  many^  subordinates  as 


WORKING  TO  SCHEDULE 


the  work  demands.  These  production  clerks  do  the  detail  calcu- 
lation, write  up  orders,  attach  instructions,  and  dispatch  them 
on  approval  by  the  chief  clerk,  follow  all  operations  that  deviate 
from  schedule  and  maintain  the  time,  material  and  cost  records. 

The  scheduling  starts  in  advance  of  each  new  season  and  con- 
cerns itself  (1)  with  the  lump  requirements  of  the  sales  depart- 
ment, known  or  estimated;  (2)  with  the  new  business  as  it  comes 
in.  The  making  of  schedules  is  simply  a  process  of  distributing 
the  work  to  be  done  over  the  time  allowed  for  it.  After  the 
general  schedules  are  settled,  the  production  department  works 
out  the  department  schedules  to  fit  these  requirements. 

How  these  successive  steps  are  taken,  under  principles  which 
may  well  be  applied  in  any  shop,  is  well  illustrated  in  the  ex- 


Mowing  Machine  Erecting  Schedule  No.1,  November  1st,1914 

Week 

Da 

•s 

ys 

Size 

Stvla 

1 

2 

3 

Total 

Ending 

£ 

s 
£ 

1 

Schedule 

Schedule 

Schedule 

Schedule 

Schedule 

Schedule 

Schedule 

Schedule 

Schedule 

Schedule 

ScheduU 

For 

Week 

To 
Date 

For 

Week 

To 
Date 

For 

Week 

To 
Date 

For 

Week 

D'a?e 

& 

DTa% 

V& 

D'a't. 

& 

To 
Date 

& 

D& 

& 

Ja't, 

V& 

Date 

,& 

& 

Trtalte 

MM 

100 

100 

200 

300 

350 

400 

400 

350 

300 

2500 

A 

62 

31 

25 

31 

25 

17.85 

25 

20.83 

17.85 

to  Make 

1.6 

3J 

1 

10 

14 

2Z4 

16 

18J 

.16.8 

108.7 

1915 
January  9 

6 

71 

71 

71 

71 

16 

12 

107 

173 

M 

178 

23 

18 

22 

200 

120 

120 

142 

320 

30 

24 

60 

200 

58 

58 

138 

458 

Februarys 

30 

40 

40 

92 

150 

132 

590 

13 

36 

50 

SO 

110 

150 

160 

750 

20 

42 

100 

150 

46 

48 

146 

696 

27 

47 

89 

137 

89 

987 

March    6 

53 

40 

40 

100 

100 

13 

150 

153 

1148 

_ 

_  ^*" 

1  —  >- 

ZZ* 

»  , 

May       1 

101 

72 

172 

3£ 

t 

107 

28 

200 

87 

237 

115 

2437 

15 

113 

63 

300 

63 

2500 

FORM  I:     The  total  machines  to  be  manufactured  during  the  season  are  indicated  in  this  erecting 

room  or  warehouse  schedule.    Sizes  are  numbered  and  styles  are  lettered.     A  separate  schedule  is 

prepared  for  each  kind  of  machine  made.     In  practice,  the  eye  catches  the  numerals  with  greater 

ease  if  the  cumulative  totals  are  in  red  ink,  and  other  figures  in  black 

perience  of  an  agricultural  plant  where  operation  is  planned 
effectively  but  informally. 

Every  operation  of  manufacture  is  subject  to  schedule.  Sched- 
ule-making begins  with  the  desired  output,  based  on  the  season's 
estimated  sales,  for  on  the  probable  sale  of  its  product  depends 


PRODUCTION  METHODS 


the  activity  of  the  whole  plant.  Rearrangement  and  compro- 
mise between  shop  capacity  and  trade  requirements  will  here  be 
necessary.  The  schedule  for  the  assembling  room  comes  next. 
Whatever  output  has  been  forecasted  must  be  accommodated  on 
the  assembling  floor,  or  in  the  factory  making  to  stock,  in  the 
warehouse.  To  blunder  at  this  point  involves  alternate  idleness 
and  congestion  in  assembling,  storing  and  shipping.  Then  come 
the  schedules  for  the  various  processing  departments.  Each  de- 
partment must  of  course  produce  each  day  its  share  of  the  out- 
put to  meet  the  assembling  room  schedule.  Fourth  in  line  are 
the  schedules  for  the  different  originating  departments,  foundry, 
blacksmith  shop  and  wood  shop.  These  in  turn  must  regularly 
deliver  the  proper  materials  to  the  processing  departments.  The 
final  schedule  is  that  for  purchasing.  Stock  needs  are  of  course 
supplied  according  to  the  maximum  and  minimum  limits  of  the 
inventory  cards.  These  limits,  however,  must  be  varied  day  by 
day.  Every  other  class  of  material  must  be  tabulated  and  pur- 


Mowing  Machines  to  Be  Manufactured 
Season  1915 


FORMS  II  and  III:    In  planning  the  work  for  the  year,  a  schedule  calendar,  such  as  that  shown  at 
the  left,  is  valuable  in  determining  the  maximum  number  of  days  which  the  factory  can  run.     Quan- 
tities and  labor  values  of  machines  to  be  made  are  recorded  on  the  form  at  the  right 

chased  in  the  proper  amount  for  delivery  to  meet  the  working 
dates.  In  the  plant  making  to  order,  similar  schedules  will  be 
made  at  short  intervals,  and  it  is  equally  important  to  have  at 
hand  such  data  on  material  and  capacity  that  the  work  can  be 
promised  intelligently  and  dispatched  at  once. 

The  management,  therefore,  will  consider  first  the  output 
schedule  based  on  sales  estimates,  modified  in  the  preliminary 


WORKING  TO  SCHEDULE 


conference  by  the  production  manager  to  conform  as  may  be 
practicable  to  conditions  of  economical  manufacture.  As  a  basis 
for  the  sales  estimate,  the  sales  manager  uses  the  order  data  from 
previous  seasons  (Figure  1). 


Workmaifs 
Number 


Hours 
Worked 


pg»KSt    **"***    i    pfffiSr 


Earnings 
per  Hour 


/  Si  63. 


83  / 


35-4 


4-3.  0 


00 


7  1 


3.3.3. 


4.0-00 


37- 


loot 


13    > 


6-0-75- 


/  0?  II 


.62. 


70 


2 


I  5  £  6 


79 


/  OO-00 


7<?  OO 


6~ 


/  ?      /  O  /3. 


/  #  3  <? 


Highest  Average  Earnings  per  Day . 

Lowest  Average  Earnings  per  Day        <37,g  .Hours  Actually  Warted7^  '  9  spoiled  attar  Planing. 

DiWerence.^ ^"-3    Hours  Lost 2*°  Total  to  to i  Planed  _ 


10  1^ 


FORM  IV:  Analysis  of  a  single  machine's  output,  showing  that  the  piecework  price  must  be  ad- 
justed, that  the  machine  operated  only  eighty-eight  per  cent  of  the  time,  and  that  it  was  worked 
eight  days  making  up  for  spoiled  work,  are  details  covered  in  this  form, — all  of  which  suggests  the 
need  of  an  adequate  remedy.  The  maximum  department  capacity  can  be  accurately  forecast  through 
the  use  of  a  series  of  such  charts 

The  estimate  of  sales  for  the  ensuing  year  is  traced  on  the 
chart  (Figure  I)  in  pencil.  Later  the  actual  sales  are  lined  in 
with  ink.  Compared  year  after  year,  the  two  lines  make  an 
interesting  study.  Such  a  chart  is  made  for  each  line  manu- 
factured. 


HOW  THE  MANUFACTURING  ORDER  IS  DIVIDED  AND  SCHEDULED 
PENDING  CORRECTION  OF  ESTIMATES 

A  FTER  the  first  line  of  products  is  estimated  by  the  sales 
manager  for  each  variety  and  size  of  machine,  and  upon 
thorough  discussion,  is  finally  approved  by  the  heads  of  the 
business,  the  other  lines,  numbers  two  to  nine  (Figure  I)  are 
also  extended  by  him.  The  charts  are  then  turned  over  to  the 
office  manager  to  be  tabulated  by  quantities  and  handed  back 
to  the  sales  manager  for  his  estimated  field  inventory,  or  "carry 
over."  After  he  has  deducted  his  estimated  stock  on  hand  at 


PRODUCTION  METHODS 


the  various  branches  and  agencies  from  the  estimated  require- 
ments, the  sales  manager  will  put  the  remainder  (that  which  is 
to  be  manufactured),  into  the  form  of  an  order.  "Manufactur- 
ing order  No.  1,"  as  it  is  called,  then  goes  to  the  production 
manager,  with  the  understanding  that  approximately  only  one- 
half  of  the  order  will  be  scheduled  until  later  in  the  season. 
Before  it  is  necessary  to  schedule  the  second  half  of  the  order, 
the  sales  department  will  have  ascertained  the  actual  sales  for 
the  past  season,  together  with  the  actual  inventory  of  machines 
left  on  hand.  The  original  manufacturing  order  can  then  be 
revised  as  may  be  necessary. 

With  manufacturing  order  No.  1  goes  an  order  for  the  various 
attachments  or  extras  entailed.  The  method  of  estimating  al- 
ready indicated  determines  the  quantities.  For  each  kind  of 
attachment  to  each  type  of  machine,  a  chart  similar  to  the  first  is 
made.  One  chart  is  devoted  to  "tops"  for  automobiles,  one  to 
"canvas  covers"  for  harvesters,  one  to  "binders"  for  headers, 
one  to  "tenders"  for  engines,  one  to  each  kind  of  "stacker"  for 
threshers.  Throughout,  these  attachment  estimates  are  handled 
in  exactly  the  same  manner  as  the  machine  estimates. 

After  receiving  manufacturing  order  No.  1,  the  manufactur- 
ing department  first  makes  up  a  finishing  or  warehouse  schedule 
(Form  I),  for  the  total  number  of  each  machine  to  be  manu- 
factured during  the  season.  At  this  point,  it  is  essential  to 
standardize  operations  and  determine  with  accuracy  the  capacity 
of  the  plant.  The  most  important  questions  to  be  considered 
are  (1)  the  maximum  number  of  days  which  the  factory  can  run 
during  the  coming  season;  (2)  the  number  of  men  that  can  be 
employed;  (3.)  the  quantities  and  labor  values  of  the  machines 
to  be  manufactured;  and  (4)  the  labor  conditions. 

To  determine  the  maximum  number  of  days  which  the  factory 
can  run  during  a  season,  a  calendar  (Form  II)  should  be  made 
for  the  entire  season,  commencing  with  the  date  the  actual  manu- 
facturing is  to  begin.  If  manufacturing  is  not  commenced  on 
all  machines  at  the  same  time,  a  calendar  should  be  made  for 
each  of  the  starting  periods. 

Next  to  be  determined  is  the  maximum  number  of  men  that 
can  be  employed.  The  working  hours  of  the  factory  or  depart- 
ment for  a  season,  multiplied  by  what  the  records  show  to  be 


WORKING  TO  SCHEDULE 


the  maximum  number  of  men  employed  in  erecting  or  making 
any  one  kind  of  machine,  will  give  the  maximum  hours  which 
could  have  been  worked.  By  deducting  from  this  the  actual 
hours  worked,  the  time  lost  is  obtained.  Dividing  the  time  lost 
by  maximum  hours  which  could  have  been  worked,  gives  the 
per  cent  of  time  lost.  If  the  hours  worked,  296,703,  be  divided 
by  2970,  the  working  hours  of  the  factory,  the  result,  100,  is 
the  average  number  of  men  employed. 

Past  records  of  most  factories  show  that  the  average  earnings 
per  man  per  day  for  any  or  all  classes  of  labor,  are  about  the 


Malarial 


£  "  X 


X'/¥ 


Requirements 


Stock  Ord3red 


Receipts 


Misc.  Deliveries 


Catalog  No, 


Date 


Catalog  No. 


Quan.  Catalog  No. 


Date     Quan.    Catalog  No. 


fro 


fit 


Catalog  No. 
Name 


Picture 


Machine  vl~ 


axix'A,*/!t>"-Vi 


Operation 


Order. 


Machine  No. 


Price 


3 


.3.7 


.3-3 


Remarks 


location 
of  Dlos 


C-.S- 


'^<A*2S^/ 


a.-*. 


FORMS  V  to  VII:  Record  is  kept  of  each  machine  part  processed  in  the  blacksmith  shop,  on  the 
operation  card  shown  (Form  VI).  Complete  instructions  are  given  to  the  workman  by  this  card. 
Even  dies  are  located  to  save  time.  The  "size  cut  from"  on  the  operation  card  is  necessary  for  the 
storekeeper's  record  (back  form).  This  record  is  filed  according  to  sizes  of  stock  and  serves  as 
an  automatic  inventory.  The  order  slip  (at  the  left,  below)  is  made  out  for  an  economical  run,  at- 
tached to  the  operation  card  and  placed  in  the  foreman's  desk 

same  for  each  year.  The  manager  and  foremen  can  anticipate 
an  increase  or  decrease  in  piece  or  day  wages  and  can  take  the 
change  into  consideration  in  determining  the  probable  future 
earnings.  Assuming  that,  on  an  average,  earnings  per  day  in  a 
position  will  be  the  same  for  the  coming  season  as  they  were  in 
the  past,  then  multiply  the  average  earnings  per  man  per  day, 
$2.50  for  instance,  by  the  average  number  of  men  who  can  be 
employed,  as  100.  The  product,  $250,  is  the  averaged  daily 
wages  of  the  maximum  number  of  men,  and  represents  the  labor 
value  of  the  maximum  daily  output. 


SO PRODUCTION  METHODS 

Next  to  be  considered  are  the  quantities  and  labor  values  of 
the  machines  which  will  be  manufactured.  The  quantity  of  each 
size  or  style  of  each  kind  of  a  machine  (Form  III)  is  multiplied 
by  the  piecework  price  (or  the  day-work  cost  for  the  past 
season),  to  be  paid  for  it.  The  sum  of  the  labor  cost  of  making 
or  erecting  all  these  sizes  is  the  total  labor  value  of  the  season 's 
total  requirements  of  this  particular  kind  of  a  machine.  One 
reason  for  making  this  calculation  is  that  the  ratio  of  the  various 
sizes  or  styles  to  the  total  of  all  sizes  or  styles  is  constantly 
changing,  otherwise  the  average  price  for  the  previous  year 
could  be  used.  The  other  reason  for  getting  the  total  labor  value 
is  to  determine  the  number  of  days  required  to  make  the 
machines. 

In  Form  III  the  total  labor  value  of  the  machines  to  be  made, 
$54,200,  divided  by  the  "average  earnings  of  100  men  for  one 
day,"  $250.00,  gives  the  number  of  days  required  to  make  them, 
which  is  217. 

In  the  event  that  this  number  of  days  exceeds  the  '  '  maximum 
number  of  days  which  the  factory  can  run"  as  determined  by 
the  calendar  (Form  II),  it  will  be  necessary  for  the  manage- 
ment to  decide  which  of  three  things  to  do ;  to  run  the  factory 
overtime,  increase  its  capacity  or  reduce  the  manufacturing 
order.  Which  of  these  policies  to  adopt  is  a  subject  worthy  of 
much  discussion. 

If  the  required  number  of  days  is  less  than  the  maximum 
number  of  days  which  the  factory  can  run,  one  of  two  things 
must  be  decided;  either  to  run  the  factory  at  its  high  rate  or 
full  capacity  for  the  number  of  days  necessary  to  manufacture 
the  order  and  then  "shut  down,"  or  run  at  a  lower  rate  for  the 
entire  season,  even  though  it  be  at  a  fractional  part  of  the 
maximum  capacity.  If  labor  is  scarce,  the  last  policy  is  undoubt- 
edly the  best,  though  not  the  cheapest,  as  it  requires  fewer  men 
and  also  preserves  an  organization  for  the  following  season, 
which  may  be  a  heavy  one.  If  labor  is  plentiful,  the  first  policy 
could  be  adopted,  reducing  the  cost  and  giving  a  long  time  for 
repairs  and  renewals,  or  permitting  an  increase  in  the  order 
later  in  the  season  should  sales  warrant  it.  This  plan  also  gives 
the  plant  an  opportunity  to  make  some  machines  in  advance  for 
the  following  season.  Under  this  method  of  scheduling  the 


WORKING  TO  SCHEDULE 31 

factory  is  likely  to  fall  behind  only  through  the  inefficiency  of 
the  men,  which  means  a  decrease  in  the  average  earnings,  or  a 
decrease  in  the  average  number  of  employees.  This,  of  course, 
is  the  extent  to  which  the  schedule  can  assist  the  manager. 

DECIDING  WHAT  SIZES  AND  STYLES 
TO  MAKE  FIRST 

"DEFORE  scheduling  the  processing  and  assembling,  it  is  of 
course  necessary  to  determine  what  sizes  and  styles  of  the 
various  kinds  of  machines  are  wanted  first.  This  can  be  deter- 
mined by  comparing  by  months  or  weeks  the  records  of  shipping 
orders  received  over  a  period  of  years.  From  the  standpoint  of 
manufacturing  costs,  it  is  essential  to  consider  the  quantities  in 
each  run  of  the  various  sizes.  Constant  changing  from  one  size 
to  another  does  not  necessarily  affect  the  cost  of  erecting  or 
finishing,  but  increases  the  unit  cost  in  the  originating  and  proc- 
essing departments.  Machines  should,  therefore,  be  scheduled 
in  as  large  runs  as  seem  feasible,  without  probable  delay  in 
shipping.  By  referring  to  Form  I,  it  will  be  seen  that  in  fifty- 
five  days  the  factory  will  have  produced  a  complete  assortment 
of  all  sizes  and  styles  of  this  machine.  By  reducing  the  runs 
from  200,  150  and  100,  to  100,  75  and  50,  a  complete  assort- 
ment of  all  varieties  will  be  made  available  for  shipment  in 
twenty-eight  days.  Time  against  economy  is  often  the  final 
problem. 

Last  season's  erecting  schedule  is  the  basis  for  determining 
the  succession  in  which  the  various  sizes  or  styles  of  machines 
should  be  made.  For  each  size  or  style  of  machine  manufactured 
in  the  past,  a  chart  is  made.  This  is  used  in  criticism  of  the 
erecting  schedule  after  the  latter  is  made  "in  the  rough "  from 
the  last  season's  schedule. 

Storage  capacity  has  an  important  bearing  on  the  erecting 
schedule,  both  as  to  the  rate  per  day  and  the  date  manufacturing 
can  probably  be  commenced.  The  storage  capacity  of  every 
branch  house  also  has  its  effect  on  the  situation. 

With  the  erecting  schedule  decided  on,  the  assembling  sched- 
ule is  next  taken  up.  The  method  of  determining  factory  capac- 
ity on  this  work  is  exactly  the  same  as  that  used  in  determining 


32 PRODUCTION   METHODS 

the  erecting  capacity.  Since  the  work  in  assembling  depart- 
ments is  practically  all  hand  work,  there  is  usually  no  question 
about  capacity.  The  same  forms  are  used  for  this  schedule  as 
well  as  the  same  order  and  rates  per  day  as  were  outlined  in 
discussing  output.  In  other  words,  the  assembling  schedule  is 
exactly  the  same  as  the  warehouse  or  finishing  schedule,  except 
for  the  dates.  These  are  set  far  enough  ahead  of  the  finishing 
schedule  dates  to  avoid  the  possibility  of  production  in  the 
finishing  departments  falling  behind  the  schedule  for  want  of 
assembled  parts. 

Next  in  order  comes  the  processing  schedule.  As  in  the  other 
schedules,  it  is  necessary  first  to  ascertain  the  capacity  of  each 
processing  department.  This  is  usually;  based  on  the  output  of 
from  one  to  five  or  six  machines  in  a  department.  These 
machines  may  be  special  or  standard.  An  analysis  of  their  work 
individually  (Form  IV)  will  give  the  maximum  capacity  of 
each  department.  The  requirements  of  the  work  and  the  dates 
when  it  should  be  started  and  completed  at  each  point  then 
follow  in  the  same  manner  as  in  the  erecting  and  assembling 
schedules. 

HOW  TO  SCHEDULE  THE  OPERATIONS 
IN  A  SINGLE  DEPARTMENT 

TF,  NOW,  the  plant  has  a  full-fledged  production  or  planning 
department  or  is  organized  along  scientific  lines,  the  depart- 
ment schedules  will  be  developed  in  detail  by  the  chief  produc- 
tion clerk.  His  orders  will  appear  on  the  plan  board  or  in  the 
individual  order  boxes  in  all  the  departments.  His  men  will 
determine  the  succession  of  work  at  every  bench  and  machine, 
together  with  the  dates  necessary  to  make  the  schedule.  In  the 
agricultural  plant  under  discussion,  however,  the  foreman  in 
each  originating  department,  as  the  foundry,  and  the  black- 
smith, sheet-metal  and  wood-working  shops,  plans  his  own  work 
on  the  basis  of  the  general  schedule.  Scheduling  in  the  black- 
smith shop  may  be  taken  as  typical  of  the  general  method. 

Orders  come  to  the  foreman  far  enough  in  advance  so  that  he 
can  plan  his  work  at  leisure  and  keep  a  task  ahead  for  every 
workman.  An  operation  card  (Form  VI)  is  made  for  each 


WORKING  TO  SCHEDULE 83 

machine  part  which  originates  or  is  processed  in  the  blacksmith 
shop.  These  cards  are  filed  in  numerical  order  by  part  catalog 
numbers  and  carry  such  information  as  the  catalog  number, 
name,  size  and  machine  of  which  the  piece  is  a  part  and  the 
number  of  the  parts  used  per  machine. 

A  rough  sketch  of  the  part  gives  a  general  idea  of  its  shape, 
though  the  part  itself  is  made  from  a  sample.  The  "size  cut 
from"  is  the  size  of  bar  from  which  the  part  is  made  and  is 
used  in  conjunction  with  the  storekeeper's  record  (Form  V), 
which  is  filed  by  size  of  bar. 

The  operation  card  is  held  in  the  active  or  reserve  file,  as  the 
case  may  be,  and  used  perhaps  years.  With  the  manufacturing 
record  before  him  the  production  clerk  or  timekeeper  takes  from 
the  file  the  operation  cards  for  the  parts  in  order  as  needed  and 
fills  in  an  order  slip  (Form  VII)  for  whatever  quantity  economy 
and  shop  conditions  indicate.  This  slip  is  clipped  to  the  opera- 
tion card  and  the  pair  are  placed  in  the  foreman's  desk  tray  in 
order  of  dates  when  the  parts  should  be  completed.  Every  day 
the  foreman  goes  over  these  cards,  chooses  the  orders  to  be 
dispatched  and  places  such  cards  in  succession  of  processing  on 
the  storekeeper's  desk. 

Daily  the  storekeeper  checks  these  orders  with  his  stores  record 
of  bars  (Form  V).  If  the  material  indicated  in  the  "cut  from 
size"  space  is  not  available,  he  still  has  time  to  procure  it  or  in 
exceptional  cases,  to  take  the  matter  up  with  the  foreman,  who 
can  then  re-schedule  the  work  in  order  to  keep  his  machines  busy. 
Lack  of  material  rarely  occurs,  however,  as  it  is  purchased  to 
meet  the  erecting  schedule,  under  delivery  dates  which  make 
allowance  for  the  rolling,  loading  and  transportation  from  the 
source.  The  storekeeper  now  places  the  card  in  the  "job  file" 
at  the  extreme  left  of  the  space  for  the  machine  on  which  the 
first  operation  is  to  be  done. 

In  this  "job  file"  is  a  pigeon  hole  for  each  machine  in  the 
shop,  large  enough  to  accommodate  a  week's  work  and  arranged 
by  machine  number  to  accord  with  the  floor  plan.  At  his  leisure 
the  foreman  runs  through  these  cards  and  rearranges  them  to 
meet  the  constantly  changing  conditions  of  the  shop.  The  work- 
man always  finds  his  next  task  on  a  card  at  the  extreme  right. 
In  a  more  highly  organized  shop  this  arrangement  would  be 


84 PRODUCTION  METHODS 

determined  similarly  by  the  route  clerk  in  the  production  depart- 
ment. 

In  this  shop  the  assignment  of  work  to  the  machinists  is  done 
by  the  timekeeper,  to  whom  the  workman  returns  the  operation 
card  and  order  slip  for  the  job  just  completed.  On  the  "  daily 
time  slip"  the  timekeeper  indicates  the  hour.  He  then  places 
the  operation  card  at  the  extreme  left  in  the  pigeon  hole  for  the 
machine  scheduled  to  handle  the  next  operation,  or  if  the  work 
is  finished,  destroys  the  order  slip  and  replaces  the  operation 
card  in  its  file.  For  each  new  job,  he  gives  the  workman  the 
card  at  the  extreme  right  of  the  proper  pigeon  hole  and  in  its 
place  files  a  time  slip  properly  filled  out.  These  time  slips, 
because  of  their  larger  size,  show  just  what  machines  are  running 
and  upon  what  they  are  working. 

While  a  man  is  working  on  a  machine  part,  the  operation  card 
stands  in  a  small  rack  near  him.  From  it  the  workman  knows 
where  to  get  the  dies  he  is  to  use,  the  rate  he  will  be  paid  for 
the  operation  and  the  machine  to  which  the  parts  are  to  be 
moved  when  he  has  finished  his  work  upon  them.  Where  the 
production  department  centralizes  the  planning  function,  one 
section  of  the  original  order  would  result  in  the  delivery  of  the 
proper  tools  to  the  machine  and  other  parts  of  the  order  would 
carry  directions  to  the  trucker  for  moving  the  material  to  and 
from  each  machine. 

As  soon  as  the  workman  has  been  assigned  his  new  job,  the 
timekeeper  computes  the  time  worked  on  the  job  just  completed, 
extends  the  cost  and  enters  the  details  from  the  time  slip  to  the 
manufacturing  record,  which  is  thus  kept  almost  up  to  the 
minute  for  reference  in  the  rearrangement  of  schedules. 

The  schedules  in  the  other  processing  departments  work  out 
in  the  same  general  way,  differing  as  to  dates,  character  of  work 
and  other  details.  The  broad  idea,  as  in  the  most  centralized 
production  department,  is  to  have  a  right  place  for  every  job 
handled,  a  responsible  person  to  schedule  it  and  a  detail  man 
to  handle  the  clerical  work,  with  a  proper  time  and  person  to 
do  it. 


Ill 

LAYING  OUT  AND  ROUTING 
THE  WORK 


HANDING  the  new  workman  a  specification  for  erecting 
a  traction  engine,  the  foreman  in  a  well-organized  trac- 
tor plant  walked  away.  The  newcomer  was  a  good  all- 
around  mechanic,  but  had  never  worked  on  tractors.  He  of 
course  stood  about  for  a  while,  expecting  that  the  foreman  would 
soon  return  to  start  him  in.  Finally,  as  the  supervisor  gave  no 
indication  of  such  intention,  the  man  went  to  one  of  his  fellows 
near  by  and  asked  him  how  they  began  here.  He  was  told  to 
read  the  specification  and  get  busy.  Doing  so,  he  was  agreeably 
surprised  to  find  his  work  clearly  indicated  step  by  step.  All 
the  parts  needed  to  assemble  one  engine  he  found  already  at 
hand.  His  first  task,  according  to  the  specification,  was  to  check 
over  these  parts.  When  he  had  done  this,  he  began  to  assemble 
them  according  to  directions,  and  although  he  had  lost  much 
time  before  starting,  he  surprised  himself  and  the  foreman  by 
finishing  his  first  job  within  the  time  limit. 

In  shops  where  production  is  worked  out  on  the  principle  of 
maximum  use  of  investment,  based  on  knowledge  of  capacity 
and  continuous  schedules  of  work  at  all  points,  every  operation 
is  laid  out  in  advance  with  the  clearness  here  illustrated.  No 
longer  are  the  foremen  called  together  in  the  old-fashioned  way 
to  talk  over  each  new  order,  to  estimate  the  facilities  of  the 
shop  for  getting  out  the  work  and  to  say  how  soon  they  can 
promise  delivery  and  what  the  cost  will  be.  The  old-time  fore- 
men essayed  the  best  answer  they  could;  and  on  the  strength 
of  their  guesses,  the  order  was  accepted  and  delivery  promised. 
Only  byj  happy  chance,  however,  was  the  outcome  under  this 


36 PRODUCTION   METHODS 

method  satisfactory  either  as  to  cost  or  date  of  shipment.  When 
an  order  goes  into  the  plant  that  operates  by  schedule,  the 
instructions  on  it  are  so  complete  that  no  planning  effort  is 
required  of  the  operators;  nor  is  there  either  delay  or  doubt  in 
handling  any  detail  of  it.  Costs,  moreover,  are  very  closely 
known  in  advance.  As  the  architect  pictures  the  entire  building 
in  blueprints  and  specifications,  so  that  materials  can  be  sawed 
to  dimension  at  mills  and  quarries  hundreds  of  miles  away  and 
still  fit  perfectly,  so  the  work  in  such  a  plant  is  pictured  and 
routed  for  the  guidance  of  those  who  do  it. 

When  the  sales  department  gets  wind  of  the  order,  the  ques- 
tions of  cost  and  delivery  come  up.  Office  and  shop  confer  and, 
consulting  the  general  schedule  of  work,  make  their  promise  of 
delivery  date.  In  this  conference  the  sales  department,  the 
production  department  and  the  engineering  department  are 
usually  represented.  Thus  the  preliminary  schedule  precedes 
the  detailed  layout  of  the  work.  But  before  the  work  can  be 
scheduled  in  full  by  departments,  the  order,  together  with  the 
promise  of  delivery  and  probably  specifications  from  the  buyer, 
goes  to  the  engineers.  On  the  basis  of  their  designs,  blueprints 
and  specifications,  by  which  the  order  is  split  into  its  parts  and 
the  work  on  each  part  indicated  in  full,  together  with  the 
requirements  as  to  material,  tools  and  dies,  the  production  clerk 
will  assign  the  work,  issue  explicit  instructions  to  every  operator 
concerned  and  make  his  detail  schedules  to  assure  completion 
of  all  parts  in  time  for  the  delivery  promised.  The  engineering 
department  indicates  what  is  to  be  done.  The  production  depart- 
ment determines  how  and  when.  Thus  the  layout  of  the  work 
is  divided  between  the  engineering  department,  which  advises, 
and  the  production  department  which  directs. 

HOW  AN  ENGINEERING  DEPARTMENT  REORGANIZED 
TO  HOLD  DOWN  LAYOUT  COSTS 

I  N  THE  engineering  office,  the  job  is  analyzed  into  its  elements, 
and  a  bill  of  materials  is  prepared.  Files  are  consulted  for 
drawings  and  specifications  covering  standard  work.  Drafts- 
men supply  detailed  working  drawings  of  new  parts  that  are 
needed.  Where  required,  the  engineers  add  specification  sheets. 


Designating  all  departments  by  two-letter  symbols  aids  accurate  routing.  Just  outside  of  the  elevator 

cages  on  each  floor  of  the  Dayton  Engineering  Laboratories  (above),  are  racks  of  the  "move"  cards 

Used  to  route  material  to  the  proper  departments.     At  the  Ford  plant  (below),  wheels  go  from  freight 

cars  to  paint  shop  as  the  bajls  are  returned  in  a  bowling  alley 


Four  ways  of  filing  orders  in  foremen's  offices  are  here  shown— cabinets,  shelves  and  pigeon-holes 
help  to  systematize  and  speed  order  transfer.     By  means  of  clip-boards,  orders  are  posted  where 
they  can  be  consulted  quickly  and  also  kept  in  good  condition,  with  no  unnecessary  handling.     Speak- 
ing tubes  permit  the  manager  to  give  verbal  orders  which  can  be  confirmed  in  writing  later 


LAYING  OUT  THE   WORK 


39 


These  plans  go  to  the  production  clerk,  who  gets  in  touch  with 
the  tool  maker  and  starts  the  work  upon  whatever  new  tools, 
jigs,  dies  and  fixtures  may  be  needed,  as  well  as  cooperating 
with  the  storekeeper  in  the  supply  of  the  right  materials.  By 
reference  to  the  factory  schedule  he  then  establishes  the  best 


_L 


tern  3  charged  from 
«ood  grip  showing  on 
detail  dwg.  7Z56  \.o 
-•ast  brass  handle, to 
sliminate  .grip  working 
eSI 


DATC  it-z-iz   Sus 
I  tarn  2  changed  from 
sheet  brass  to 
hardened  steel  See 
Gen.  Change  Order 401 
Shop  Order  13891, 


-mlAlBl  I  I  f  I  I  I  I  I 

MATERIAL.  LIST 


DESCRIPTION. 


Levar  Bar, -Sty  4692- 


Rd.  Brass  Rod  «• 


R.H.  I.  Hch.  Screw  Sty.  87 1 


Hardened  loot    Steel  X.X, 


THE  JONES  METER  CO. 

CHICAGO.  ILL. 

F-29902 

RELEASE   LEVER  ASSEMBLY 

TYPE"R" 
2V AUTOMATIC  "4M"  METER. 


FIGURE   II:      Each  item  of  material  necessary  to  manufacture  the  article  shown  in  the  drawing 

is  listed  at  the  right.     Numbers  in  circles  corresponding  to  the  numbers  in  the  item  column  of  the 

material  list  identify  all  parts,  and  clerical  expense  is  avoided  by  making  an  extra  print  and  cutting 

off  the  entire  right  end  for  the  cost  and  stores  department  files 

place  to  fit  the  order  into  the  routine.  Finally,  he  develops 
processing  instructions  for  the  close  guidance  of  all  those  who 
will  have  anything  to  do  with  the  work,  from  the  superintendent 
down  to  the  move-men.  When  the  order  goes  into  the  shop,  execu- 
tion will  then  commence  at  once  and  proceed  smoothly,  quickly 
and  without  delays  or  mistakes,  to  completion  on  time  and  in 
the  manner  specified. 

The  greatest  gain  from  following  this  procedure,  of  course, 
accrues  to  the  factory  which  operates  largely  to  customer's 
order.  Then  the  necessity  for  specialized  planning  is  greatest. 
But  it  is  illogical  to  say  of  any  factory  that  it  can  not  afford  a 
planning  department.  Planning  must  be  done  even  if  it  does 


40 


PRODUCTION    METHODS 


not  appear  as  a  separate  item,  and  economy  indicates  that  it  be 
specialized.  In  the  plant  manufacturing  to  stock,  the  procedure 
automatically  reduces  to  an  efficient  routine.  On  manufacture 
to  order,  however,  planning  usually  results  in  important  econ- 
omies. The  expense,  moreover,  need  never  be  excessive. 


FIGURE  III:      By  standardizing  the  styles  of  gages  and  small  tools  used  in  its  plant,  an  Illinois 

company  is  able  to  have  blueprints  made  up  with  Iblanks  left  for  the  dimensions.     This  method  saves 

much  unnecessary  drafting  on  small  jobs,  and  consequently  helps  to  cut  down  the  cost 

New  patterns  and  dies  represent  an  expense  which  can  often 
be  reduced  greatly  by  intelligent  layout.  An  order  is  received 
for  an  article  which  differs  in  detail  only  from  existing  patterns. 
Bather  than  rummage  through  unsystematized  files  or  tinker 
with  drawings  which  may  or  may  not  fit,  the  draftsman  prepares 
a  new  drawing,  which  necessitates  new  patterns  or  dies.  Exist- 
ing drawings  or  tools  might  have  been  used  in  many  such  cases, 
perhaps  by  altering  some  minor  features'  or  merely  preparing 
sketches  for  the  new  elements.  Particularly  is  this  true  in 
factories  making  an  assembled,  or  built-up  product. 

In  an  engine  and  saw-mill  machinery  shop  which  prided  itself 
upon  the  originality  of  its  designs,  this  condition  became  so 
serious  that  specialists  were  called  in  to  reorganize  the  methods 
of  planning  and  laying  out  the  work. 


LAYING  OUT  THE  WORK 


41 


Sheets 

£2448  Miami 
>  Connecting  Rod. 

>rglng  (1  per  Machine), 
it  Open  Hearth  Steel. 

Nor.     2,  1914 
Dee.  14.  1914 
Dae.  28.  1914 

Time  Allowance 

Sheet  No.  fr 
Writtfin  by 

Proof  r*»f  h«                           ****  * 

Checked  by   

Operations 

Tools 

Tool  No. 

Hours 

Wanted 
per  Hour 

Actual 
per  Hour 

Setting 
Up 

SIT 

1.  Xaapeot  forging,  for 
Imperfeotiona.     Re- 
ject imperfect 
oaatinga  and  return 
to  D.  Mfg.  Oe.  for 
credit. 

8.  Clean  forgiaga. 

3.  Straighten  If 
noooaaary. 

4.  Stamp  ona  aide  with 
cipher. 

5.  (a)  Drill;  rough 
ream  and  f  inlah 
reu  In  Jig; 

place  cipher 
•Ida  up. 

Or  iU  Preaa  (let  floor) 
Drill  Jig. 
1-3/64"  Drill 
1.047"  Slip  Buahlng. 
51/64"  Dritl 
.798"  Slip  Bushing* 
1-I/L6"  Adj.  "Reamer 
13/16  Adj.  Roamer 
1-1/L6"  Int.  Plug  Gauge. 
13/16"  Int.  Plug  Gauge. 

210 

atk 

211 

212 
'atk 
atk 

(b)  Drill  for  #10-30 
aerew  in  end. 

.161"  Drill 

atk 

6.  Tap  for  #10-30  aore». 

Tapping  Machine 
f  10-30  A.S.M.E.   P..H.   TAP. 
#10-30  Thread  Gauge 

•tk 

atk 

7.  Burr  holea. 

8.  Assemble  with  #76 
Bushing  and  #77 
Buahing.     Place 
cipher  aide  up. 

Arbor  Preaa 
Aeaenbling  Fixture 

214 

9.  Drill  for  (2)  angular 
oil  hclee.     Drill 
for  oil  bole  in  end. 

Drill  Preaa 
Jig. 
|22  (.157")  Drill 

213 

10.  Counteraink  (3)  oil 
holea. 

Speed  Lathe 

Countersink. 

atk 

11.  Spot  for  acraw  flB. 

Speed  Lathe 
#22  (.157")  Drill  Starter. 
1/8"  Drill 

atk 

12.  Ben-ova  burr  frw 
buahing. 

Beta  Have  your  work  inspected  every  two  hours.  Inspect  first  piece  finished  on  each 
operation  before  doing  balance  of  the  lot 

FORM  VIII:  In  a  factory  organized  on  a  scientific  basis,  thinking  and  planning  are  done  by  the 
engineering  department  instead  of  the  workmen.  The  operator  merely  carries  out  the  directions  he 
receives  from  the  production  department.  The  above  form  is  an  example  of  carefully  indicated 

instructions 


PRODUCTION  METHODS 


Hart-Parr  Co.  Shop  Order 


Op.  Jto.I 


Total  No.  Op. 7 


A    94820 


Part  Ha.      4142 


Department  Ordering §l 

Director         .   ^<*f  g  • 
Date  Ordered. 


.  let  or  Req.  Hfr 
__  _  Ch 


Machine  Ne 


4L 


What  Purpose  Used  for. 


To  Be  Finished. 


Following  are  the  departments  through  which  this  order  must  pass  and  who  must  slgn.up  as  order  Is 
passed  along  departments  in  order  horizontally 


Instructions 

FLAT  HEAD  PISTON 
FACE  END  AND  BORE  FOR  AUTOMATIC: 

Insert  3"  arbor  through  piston  pin  hole.  Arbor  should 
be  long  enough  to  project  about  4"  from  each  side  of  casting.  Hoist  casting  on  boring 
Bill  table  with  arbor  resting  on  V  blocks  at  each  end.  V  blocks  should  be  lined  up  so 
arbor  is  held  exactly  parallel  with  face  of  table.  True  up  so  end  of  casting  can  be 
bored  exactly  central  with  pin  hole  and  strap  V  blocks  down  very  firmly  in  this 
position.  Also  strap  arbor  down  firmly  in  V  blocks  at  each  end.  Chuck  lower  end  of 
casting  in  jaws  so  sides  are  square  with  face,  of  table  on  all  sides.  Face  edge  of 
casting  true  and  square  so  it  is  cleaned  up  on  all  sides  and  rough  and  -finish  bore  rlo 
on  inside  to  exact  diameter  given  on  drawing  so  it  will  engage  centering  plate  on 
automatic  properly.  Place  tool  in  head  and  bevel  outside  corner  qf  casting  so  scale 
is  cut  from  all  sides  at  top  of  casting.  Next  operation  is,  BORE  PISTON  PIN-HOLE. 


Tools  for  This  Orter 
Checked  In 


Over  for  Material.  Tim  and 


FORMS  IX  and  X:  Records  ot  schedule,  routing,  instructions,  tools,  material,  assembling,  time 
and  inspection  are  all  provided  for  on  one  form,  known  as  the  shop  order,  in  the  plant  of  the  Hart-Parr 
Company.  The  reverse  side  is  shown  on  the  opposite  page.  In  the  space  at  the  top  of  the  reverse 

As  an  initial  step,  the  consultants  thoroughly  overhauled  the 
practice  of  the  drafting  room.  They  first  standardized  sheets 
to  letter  size — eight  and  one-half  by  eleven  inches.  This  change 
made  for  convenience  in  handling  and  permitted  vertical  filing 
of  both  drawings  and  prints.  Only  one  drawing  was  to  appear 
on  a  sheet,  and  every  separate  piece  for  which  separate  drawings 
did  not  already  exist  was  drafted  again  to  meet  this  require- 
ment. Some  larger  sheets  were  necessary  for  certain  group  and 


LAYING  OUT  THE  WORK 


43 


Floor  Inspector's  Charge  to  Assembling  Department                                          Assembing  Dept  Returns 

P?«es 

Date 

By 

No. 

Pieces 

Date 

By 

No. 
Pieces 

Date 

»     P& 

Dat» 

By 

Total  Rec'd 

Net  on  Hand  in  Assembly  Dept                       Pieces  by                          Total  Returned 

Time  and  Inspector's  Records 

Name  Of  Workman 

Time 
Started 

Time 
Stopped 

Total 
Elapsed  Time 

M'ch. 
No. 

Op. 

No. 

Inspector's  Reports 

Date 

Amt 
Giver 

Work 
Done 

Signature  of 
Inspector 

Date 

Time 

Date 

Time 

Mrs. 

Min. 

%y 

//*3. 

Vz-f 

fisa. 

30 

**?/ 

/ 

(•-3? 

.*V>0 

f^to 

^.^ 

%£ 

£t£- 

m 

ff** 

3.9 

00 

**S7 

/ 

<>/*£ 

/6% 

•9»r.  //•, 

to/i-l 

•7**.  /*; 

"/a 

•$~ 

"55».  /941. 

3~.  ?l-Jue*+-v<- 

%<- 

7<£ 

SfeE 

t&- 

v& 

£0 

**?7 

/ 

*/,,#• 

/*% 

(»,  £,, 

5^-* 

/?$• 

*/3-1 

3-0 

<*.e. 

y».f 

n.¥ 

c.e. 

'  "^^^-  :  —  ~  ~  —  L~—  — 

r^  =n 

^  —  ^ 

n 

\-_ 

—  —  "^ 

.  —  '  —  — 

•  «^. 

^ 

-*-^-^^. 

~_-^~\—  —  » 

.s-^-"^ 

—  1 

^\ 

Inspector's  Totals 

3     ' 

Material  Required 

.     Entity 

Description 

Weight  Charged 

Sig.  and  Date 
for  Charge 

Amount 
^6  turned 

Sig.  and 
Date  for  Ret. 

JL0  C 

/7_     ^.    ^jl^f-nX    Qat&£'         <3<*f       "***f~f  ^f~3-*~ 

x)  ^    C^  ^   ^t- 

£7     &/},,'+ 

2*, 

A 

*tfc^c*4*fai*(        ''/a.'?//*?          ??t,  Sf-. 

j^isa^^x^taeL          ^/a-vy/tf            "5?r    //^ 

f^iT"                       f 

side  an  account  is  kept  of  the  product  sent  to  the  assembling  department.    The  easy  comparison  of 

one  man's  record  with  that  of  another  encourages  a  profitable  rivalry.      This  space  is  used  only  for 

the  last  operation  orders.     The  form  is  a  complete  production  record  of  one  order 

assembly  drawings,  but  these  were  worked  out  in  multiples  of 
the  standard  size,  so  that  they  could  be  filed  when  folded.  The 
drawings  were  consecutively  numbered  and  when  the  design  of 
any  part  was  so  altered  as  to  require  a  new  drawing,  the  revised 
detail  was  given  a  sub-number. 

All  drawings  were  indexed  so  that  the  engineer,  knowing  the 
subject,  could  locate  any  set  of  drawings  at  once.  The  rule 
was  then  laid  down  that  before  new  drawings  could  be  started, 


PRODUCTION  METHODS 


a  report  from  the  filing  department,  approved  by  the  chief 
engineer,  must  indicate  that  no  existing  drawing  would  serve. 
In  this  way,  needless  duplication  was  avoided.  Additional  sets 
of  prints  were  grouped  as  the  parts  would  be  assembled  and 
also  for  similar  parts  differing  in  details  only. 

Each  print  showed  every  essential  dimension  with  allowance 
for  machining  or  other  shaping.  To  indicate  the  finish  of  the 
various  surfaces,  a  system  of  symbols  was  devised,  charted  and 
posted  around  the  factory  for  ready  reference.  This  expedient 
saved  time  in  drafting  and  reading  prints  and  eliminated  many 
errors  that  result  from  indistinct  lettering  or  unusual  wording. 
The  drawing  number,  title,  group  to  which  a  piece  belongs,  final 
article  into  which  assembled  and  other  indexing  data  appear  on 
each  sheet  in  a  definite  manner  and  place. 

No  separate  sheet  or  card  was  provided  for  the  details  of  the 
operation.  These  points,  such  as  departments  doing  work  on 
the  part,  operations  designated  by  name  and  number,  tools 
required,  machine  speeds  and  feeds,  standard  times  for  each 
operation  and  rates  of  payment  with  premium  award  if  any, 
were  grouped  together  neatly  in  the  upper  right-hand  corner  of 
the  drawing  itself.  Only  in  rare  cases  was  this  space  too  small 
to  carry  the  instructions.  Thus  the  units  for  filing  and  reference 
were  held  to  a  minimum  number. 

Prints  of  parts  repeatedly  required  were  mounted  on  a  light 
fiber  board  with  a  coat  of  shellac  to  preserve  them,  and  were 
placed  on  file  in  the  tool  room.  When  an  order  reached  the 
tool  keeper  he  had  only  to  consult  the  proper  drawing  in  order 
to  prepare  the  tools  required.  These  he  handed  out  together 
with  the  drawing  itself  for  delivery  to  the  first  operation.  The 
drawing  traveled  with  the  part  until  delivery  to  assembly,  when 
it  automatically  returned  to  the  storage  as  proof  that  assemblage 
had  begun. 

Hourly  the  tool-keeper  reported  the  returns  to  the  office,  and 
by  this  information  the  control  board  record  of  manufacturing 
was  kept  posted.  A  duplicate  of  each  drawing  also  was  pro- 
vided for  the  convenience  of  the  tool  man  in  assembling  tools 
for  succeeding  operations.  "With  the  order  he  also  received  a 
copy  of  the  production  department  schedule,  by  means  of  which 
to  time  himself  in  getting  up  the  tools. 


LAYING  OUT  THE  WORK 45 

To  aid  the  production  clerks  in  laying  out  work  and  perfect- 
ing the  detail  schedule,  "family-tree"  drawings  were  provided 
by  the  engineering  department  for  every  assembly  group. 
These  showed  the  time  required  to  produce  each  part,  to  make 
all  sub-assemblies  and  the  final  erection.  They  were  graphic 
charts  to  guide  the  production  clerks  in  preparing  schedules, 
issuing  the  instructions  for  the  various  operations,  and  keeping 
the  control  board  up  to  date.  Machine  speeds  and  feeds,  though 
arbitrarily  fixed  at  the  start,  were  soon  corrected  by  time  study 
and  past  performances  to  the  point  of  thorough  dependability. 

THE  THREE  BASIC  PRINCIPLES 
OF  EFFICIENT  OPERATION 

\\7  HAT  was  accomplished  in  standardizing  and  simplifying 
the  work  of  layout  at  this  plant  points  the  way  to  savings 
which  can  still  be  made  in  most  shops.  Three  simple  principles 
are  involved.  The  first  of  these  is  to  have  an  approved  way  of 
accomplishing  every  operation.  This  way  is  to  be  established 
as  the  rule,  usually  by  time  and  motion  studies  under  a  specialist 
on  a  basis  of  standardized  equipment  and  working  conditions. 
This  data  gives  the  production  department  the  necessary  known 
quantities  in  its  problem. 

To  plan  each  step  before  attempting  actual  operation  is  the 
second  principle.  This  covers  the  scheduling,  layout  and  rout- 
ing work  done  by  the  engineering  and  production  departments 
on  the  basis  of  the  capacity  standards. 

To  reduce  all  standard  operations  to  written  form  is  the  third 
principle.  "When  dimensions,  processes  and  order  of  operation 
have  once  been  determined,  it  is  logical  to  formulate  them  into 
a  written  or  printed  code  for  the  future  guidance  of  all  con- 
cerned. Permanent  drawings  of  product  designs  are  probably 
the  earliest  examples  of  this  principle.  Yet  the  roughest  pencil 
sketches  of  designs  once  served  the  purpose  and  such  drawings 
still  convey  positive  instruction  on  only  a  few  of  the  points 
involved  in  manufacture.  A  thorough-going  production  order 
now  indicates  sequence  of  operations,  definite  procedure  at  every 
stage,  tools  to  use,  the  time  each  task  should  take  and  the  schedule 
of  payment.  With  proper  drawings  as  a  guide,  any  factory  can 


46 PRODUCTION  METHODS 

build  a  fairly  good  machine  or  fashion  an  attractive  piece  of 
furniture,  if  given  unlimited  time  and  not  curbed  as  to  expense. 
Only  the  factory  whose  production  clerk  can  indicate  in  detail 
the  time,  method  and  cost  of  each  step,  however,  can  hold  its 
own  against  well-planned  competition  (Forms  VIII-X). 

With  drawings,  tools,  dies  and  operations  so  standardized  and 
indexed  as  to  avoid  all  repetition  of  mental  work  once  done, 
the  factory  can  proceed  at  once  with  a  layout  of  new  points 
and  thus  secure  a  lead  upon  any  old-style  rival.  This  is  the 
sound  procedure  in  production  layout.  How  extensive  the 
operational  instructions  should  be  depends  upon  the  character 
of  the  work.  In  the  instance  cited,  the  drawing  itself  carried 
the  essential  data.  In  some  plants  such  directions  as  can  be 
given  on  the  time-cards  are  sufficient  in  many  departments.  On 
other  operations,  the  work  may  be  so  complicated  as  to  require 
a  dozen  or  more  typewritten  sheets.  The  specification  for 
assembling  a  traction  engine  or  a  saw-mill  plant  is  voluminous 
and  in  preparation  is  a  huge  task,  yet  the  success  and  economy 
of  this  plan  has  already  been  shown. 

Permanent  written  standards  in  other  cases  are  possible.  In 
the  works  of  the  Westinghouse  Electric  &  Manufacturing  Com- 
pany standards  of  practice  on  standard  operations  are  filed  at 
convenient  points  throughout  the  plant  for  quick  reference 
by  everyone  concerned.  Much  made-to-order  manufacture  can 
be  handled  in  this  way.  Such  work  is  largely  of  a  repetitive 
nature  in  which  the  same  man  may  work  on  one  operation  for 
months  or  years.  In  such  cases  reference  sets  of  specifications 
placed  at  the  disposal  of  workmen,  supervisors  and  time  clerks 
serve  their  purpose.  It  is  only  essential  to  revise  these  instruc- 
tions when  operational  changes  are  made,  to  advertise  the 
change  to  the  shop  and  to  maintain  the  standard  practice 
through  the  work  of  inspectors. 


I  |i    IV      ;    .    ;    HI 

WHAT  QUANTITY  TO  MAKE 
AT  ONCE 


EVERY  manufacturer,  in  putting  through  an  order,  encoun- 
ters the  problem  of  finding  the  most  economical  quantity 
to  make  at  once.  This  is  a  general  problem  and  admits 
of  a  general  solution.  Up  to  a  certain  point,  mathematics  answers 
it  definitely,  as  with  a  thoroughly  standardized  product  like 
automobile  parts  in  a  large  plant.  It  is  not  put  forth,  however, 
that  any  mere  mathematical  formula  can  be  depended  upon 
entirely  to  determine  how  much  stock  should  be  carried  or  put 
through  on  an  order.  This  is  a  matter  that  calls  in  each  case 
for  a  trained  judgment,  for  which  there  is  no  substitute.  With 
special  orders  and  under  the  emergencies  that  are  constantly 
arising,  the  mathematical  formula  will,  of  course,  give  only 
approximate  results,  which  must  be  tempered  with  judgment, 
based  on  knowledge  of  the  factors  involved  in  economical  pro- 
duction and  grasp  of  wise  business  policy. 

Most  managers  are  ambitious  to  emulate  the  big  shop  in  its 
long  runs.  But  the  commodity  on  which  a  small  business  is 
based  is  usually  of  a  different  character  from  that  which  the 
big  plant  handles.  Seasons  and  storage  facilities  vary.  The 
demand  for  the  article  has  its  ups  and  downs.  Special  work 
constantly  makes  it  necessary  to  recast  the  schedule.  Equip- 
ment is  limited  or  highly  specialized,  easy  of  adjustment  or 
difficult  and  costly  as  to  set-ups.  Long  runs  are  monotonous 
and  often  workmen  lose  interest.  All  these  considerations  and 
especially  the  requirements  of  the  schedule  and  the  expense  of 
a  new  set-up  are  involved  in  every  decision  on  size  of  lots. 
Sometimes  a  day's  run  on  a  set-up  is  a  sound  limit.  Such  an 


48 PRODUCTION  METHODS 

arrangement  may  make  it  possible  to  have  the  set-up  handled 
out  of  hours.  If  only  a  few  minutes  is  required  to  adjust  the 
machine,  and  the  adjustment  can  be  made  exactly  without 
experiment,  the  length  of  run  may  make  little  difference  in  the 
cost.  If  the  operator  is  working  on  a  piece  rate,  one  element  in 
the  cost  of  set-up  is  eliminated.  But  the  question  of  idle  machine 
time  still  enters.  If  the  set-up  is  done  at  a  piece  rate  also,  the 
cost  is  fixed,  whereas  an  adjustment  at  day  wages  is  an  uncertain 
quantity  and  requires  strict  supervision. 

CALCULATING  ECONOMICAL  SIZE  OF  LOTS 
UNDER  STANDARD  CONDITIONS 

I  N  CASES  of  minor  importance  a  trained  judgment  based  upon 
these  points  will  determine  the  size  of  lots  with  sufficient 
accuracy.  Where  larger  quantities  are  involved  and  conditions 
are  standard,  an  estimate  with  its  chances  of  mistakes  should 
scarcely  be  final.  Application  of  the  mathematical  formula  is 
then  warranted  at  least  as  a  check  upon  the  judgment.  Given 
the  size  of  lot  which  by  mathematical  theory  is  cheapest,  the 
manager  can  the  better  supply  such  corrections  as  seem 
important. 

In  determining  the  economical  size  of  lot  the  following  main 
factors  are  involved : 

Unit  Cost  (C).  This  is  the  cost  in  dollars  per  unit  of  output 
under  continuous  production,  without  considering  the  set-up  or 
getting-ready  expense,  or  the  cost  of  carrying  the  stock  after  it 
is  made, 

Set-up  Cost  (S).  This  involves  more  than  the  cost  of  getting 
the  materials  and  tools  ready  to  start  work  on  an  order.  It 
involves  also,  the  cost  of  handling  the  order  in  the  office  and 
throughout  the  factory.  This  cost  is  often  neglected  in  consider- 
ing the  question.  Most  managers,  indeed,  have  a  rather  hazy 
idea  as  to  just  what  this  cost  amounts  to.  If  such  is  the  case,  an 
investigation  will  show  that  the  cost  of  handling,  checking, 
indexing  and  superintending  an  order  in  the  offices  and  shops 
is  a  considerable  item  and  may,  in  a  large  factory,  exceed  one 
dollar  per  order. 

The  set-up  cost  proper  is  generally  understood.    Indeed,  shop 


FIXING  THE  SIZE  OF  LOTS 49 

foremen  appreciate  only  too  well  what  the  cost  of  set-up  means 
on  small  orders,  and  so,  if  left  to  themselves,  will  almost 
invariably  put  their  work  through  in  large  quantities  to  keep 
down  this  item.  So  doing,  however,  affects  unfavorably  the  next 
factor ; 

Interest  and  Depreciation  cm  Stock  (I).  Large  orders  in  the 
shop  mean  large  deliveries  to  the  storeroom,  and  large  deliveries 
mean  carrying  a  large  stock.  Carrying  a  large  stock  means  a 
lot  of  money  tied  up  and  a  heavy  depreciation.  It  will  here  be 
assumed  that  a  charge  of  ten  per  cent  on  stock  is  a  fair  one  to 
cover  both  interest  and  depreciation.  It  is  probable  that  double 
this  would  be  fairer  in  many  instances. 

Movement  (M).  It  is  evident  that  the  greater  the  movement 
of  the  stock  the  larger  may  be  the  quantities  manufactured  on 
an  order.  This,  then,  is  a  vital  factor. 

Manufacturing  Interval  (T).  This  is  the  time  required  to 
make  up  and  deliver  to  the  storeroom  an  order,  and,  while  it 
seldom  is  a  vital  factor,  it  is  of  value  in  the  discussion. 

There  is  another  factor,  X,  the  unknown  size  of  order  which 
will  be  most  economical.  Thus  summarizing,  there  are  the  fol- 
lowing factors  in  the  problem : 

M  equals  the  number  of  units  used  per  month  (movement). 

C  equals  the  quantity  cost  of  a  unit  in  dollars  or  the  unit  cost. 

S  equals  the  set-up  cost  of  an  order  in  dollars. 

T  equals  the  manufacturing  interval  in  months. 

I  equals  the  unit  charge  for  interest  and  depreciation  on  stock. 

X  equals  the  unknown  size  of  order,  or  lot  size,  which  is  most 
economical. 

The  manufacturing  interval  is  useful  only  in  that  it  enables 
us  to  find  the  safe  stock  minimum,  or  smallest  quantity  the 
storekeeper  may  allow  his  stock  to  fall  to  before  he  must  enter 
an  order  for  more. 

At  first  sight  this  minimum  quantity  would  seem  to  influence 
the  amount  of  stock  and  therefore  the  interest  charges.  It  does 
nothing  of  the  kind,  however,  and  it  will  be  found  that  the  stock 
consists  of  additions  in  lots  of  X  and  a  gradual  exhaustion  of 
the  stock  to  nothing.  The  stock  minimum  simply  serves  to  notify 
the  storekeeper  when  to  enter  an  order  for  new  stock,  so  that 
he  will  use  up  his  stock  clean  before  deliveries  on  the  new  order 


50 


PRODUCTION   METHODS 


are  made  and,  at  the  same  time,  never  be  without  stock  for  any 
considerable  interval. 

The  average  stock,  if  the  movement  is  regular,  it  will  be 
evident,  is  one-half  of  X.  If  the  movement  is  irregular,  and  it 
generally  is,  there  is  introduced  an  additional  complication. 


1  Costs  in  Decimals  6}  •  Cent 

Z  8  5 

.00*9 
«008 

^  -  -  j(^)|              Monthly  Quantfty  -  M  -  UM 

Mtlcto  -ASnuUCouMctot     S*t-npCo««             -Sij.15 
MaterUl  -  Copper                *"g.  Quantity        -  X.  -  685* 

\ 

\ 

£M2f 

x 

\ 

\ 

^, 

>" 

x 

\ 

| 

\ 

•  — 

T" 

—  -• 

X 

? 

\N 

Total  Coi 

!CNo« 
L;aJI 

lid.) 

\ 

tS'ggE'S 

<-ak 

x 

\ 

\ 

s  ^ 

^ 

^ 

\ 

> 

/ 

y» 

\j 

^ 

"TIT 

Dep 

rest 

and 
tion 

x= 

\ 

x 

V 

IntcTMtand' 

- 

. 

-!^t 

.•Ml 

JftOOl 

Sot-upCort 

> 

k 

^-* 

x 

2 

^ 

N 

^> 

^ 

-^^^ 

J 

J? 

.•toMUfet^ 

X* 

-^~ 

^ 

9. 

^> 

r^ 

•  •Hisssum 

Size  of  Order 

^ 

^ 

Thousands  of  Pieces 

FIGURES  IV  and  V:  How  costs  vary  in  proportion  to  the  quantity  of  product  manufactured 
ia  illustrated  by  the  graphs  shown  in  these  two  figures.  At  the  left,  an  increase  in  the  size  of  the 
order  results  in  an  increased  interest  charge  and  a  decreased  set-up  cost.  The  curves  indicate  a 
minimum  total  cost  in  this  case  of  2,200  units.  At  the  righ|  is  shown  the  effect  of  the  size  of  the  lot 
on  the  set-up  and  interest  charges  per  unit.  The  set-up  cost  curves  slope  downward  with  increased 
•ize  of  order  while  the  interest  curves  slant  upward.  The  sum  of  the  two  elements  gives  the  total 
costs,  the  curve  of  which  is  the  upper  one  and  shows  a  minimum  opposite  where  the  two  lower 

curves  cross 

This,  however,  can  generally  be  neglected  or  applied  as  a  cor- 
rection factor  to  the  final  result.  The  average  stock  being 
~,  the  value  of  this  stock  will  evidently  be  C  times  this,  or 
(value  of  average  stock  on  hand). 

This  is  the  quantity  cost  only.  To  it  must  be  added  the  set-up 
cost  for  the  average  stock.  Since  the  set-up  cost  per  order  is  S, 
and  the  average  stock  is  half  the  size  of  an  order,  the  set-up 
cost  of  the  average  stock  will  be  %S.  The  total  value  of  the  aver- 
age stock  will  then  be  ^(CX+S).  The  annual  interest  and  de- 
preciation cost  at  ten  per  cent  will  be  one-tenth  this  or  %0 
(CX+S). 

Now  since  M  units  per  month  are  used,  there  will  be  12M  units 
per  year,  and  this  interest  charge  must  be  divided  by  the  number 
of  pieces  used  in  a  year  to  get  the  interest  charge  in  dollars  per 
unit,  which  gives  (CX+S)~240M  equals  I. 


FIXING  THE  SIZE  OF  LOTS 51 

The  total  set-up  cost  for  X  units  being  S  dollars,  the  se>up 
cost  per  unit  must  be  S-f-X.  This  now  gives,  as  the  whole  cost  of 
a  unit,  the  interest  charge  per  piece  plus  the  set-up  cost  per 
piece  plus  the  unit  cost  per  piece,  or 

(CX+S)         S 

+  —  +  C. 

240  M  X 

Let  this  summation  equal  Y. 

The  problem  then  is  the  old  one  of  finding  the  value  for  X 
that  will  give  the  minimum  value  to  Y.  As  the*  solution  of  this 
problem  involves  higher  mathematics,  suffice  it  to  say  that  the 
value  for  X  that  will  give  the  minimum  value  to  Y,  reduces  to 
the  square  root  of  (240  MS  divided  by  C).  Call  this  fraction  V. 

Now  V  may  be  calculated  at  once  and  the  square  root  taken. 
Call  this  result  K,  because  it  will  be  a  constant  for  ang  case. 
Then  X  equals  K  times  the  square  of  M. 

HOW  THE  FORMULA  FOR  DETERMINING  QUANTITIES 
WORKS  OUT  IN  PRACTICE 

T  ET  an  actual  example  be  taken  and  see  what  the  results  will 
be.  Suppose  that  an  article  has  a  movement,  M,  of  1,000 
units  per  month  with  a  set-up  cost  of  two  dollars  and  a  unit 
cost  of  ten  cents.  Applying  the  formula,  it  is  found  that  in 
theory  the  most  economical  size  of  lot  is  2,190  units.  This  shows 
the  set-up  cost  to  be  about  0.1  cent  and  the  interest  charges  about 
the  same  amount. 

In  Figure  IV,  a  curve  will  be  seen  representing  the  cost  per 
piece  of  set-up  for  various  manufacturing  quantities  and  an 
interest  and  depreciation  charge  under  the  same  conditions. 
The  sum  of  these  two  is  marked  the  total  cost,  although  it  does 
not  include  the  unit  cost  of  ten  cents,  which  is  not  added  because 
assumed  constant.' 

It  should  be  noted  that  this  so-called  total  cost  can  vary 
between  wide  limits  only  when  the  manufacturing  quantity  is 
selected  with  very  poor  judgment.  For  example,  in  the  case 
given,  the  least  total  cost  possible  will  be  about  0.188  cents  at 
2,190  units  on  an  order.  This  quantity  can  vary  from  1,000  to 
5,000,  and  the  additional  cost  will  be  only  about  0.05  cent.  On 


52 PRODUCTION  METHODS 

an  article  costing  ten  cents,  this  is  a  very  small  percentage. 
While  this  is  true  for  the  values  given  it  is  not  universally  true, 
and  thus  it  is  seen  that  the  general  law  can  be  applied  with  some 
profit  to  the  specific  problems  of  manufacture. 

The  theory  underlying  the  economic  size  of  lots,  is  not  widely 
enough  understood.  For  example,  having  once  determined  that 
it  is  wise  to  put  in  orders  for  lots  of  one  hundred,  based  on  a 
certain  consumption,  it  is  of  value  to  know  that  this  consumption 
must  increase  four-fold  to  warrant  doubling  the  manufacturing 
quantities.  It  is  further  gratifying  to  know  that  the  effect  on 
profits  from  an  error  is  as  small  as  is  shown  by  the  curves. 

This  method  is,  of  course,  not  rigorously  accurate,  for  many 
minor  factors  have  purposely  been  left  out  of  the  consideration. 
It  may  be  objected  that  interest  and  depreciation  should  be 
figured,  not  only  on  original  cost,  but  also  on  the  set-up  cost, 
since  that  has  to  be  incurred  before  the  parts  can  be  stocked. 
Such  points,  however,  while  interesting,  are  too  fine-spun  to  be 
practical.  The  general  theory  as  developed  here  is  reasonably 
correct  and  gives  good  results  in  determining  one  of  the  most 
perplexing  problems  of  production. 


V 

REGULATING  STOCK 
PRODUCTION 


HOWEVER  well  production  has  been  scheduled  and  laid 
out,  there  still  remains  the  problem  of  seeing  that  the 
schedules  are  upheld  and  readjusted  to  new  demands. 
Work  must  be  traced  and  pushed.  New  work  must  be  accom- 
modated with  the  least  possible  disturbance  to  the  fixed  routine. 
Schedules  will  at  times  break  down,  and  it  then  becomes  the 
duty  of  the  production  chief  to  reestablish  the  even  output  of 
parts  by  speeding  up  one  department,  slowing  down  another, 
expanding  certain  facilities  or  giving  the  right  of  way  to  one 
set  of  orders  over  another.  Capacity  and  requirements,  changing 
hour  by  hour,  must  be  reconciled  to  each  other. 

In  dealing  with  these  situations,  railway  operation  offers  a 
practical  ideal  toward  which  the  factory  may  well  work.  No 
other  business  is  perhaps  so  thoroughly  scheduled  as  railroading. 
Through  passenger  trains  have  the  right  of  way  over  local  travel, 
and  this  in  turn  has  precedence  in  general  over  freight  traffic. 
The  time  table  embodies  these  policies.  Unforeseen  interrup- 
tions, as  flood,  landslide  and  accident,  break  the  schedule. 
Anticipated  interruptions,  as  by  special  trains,  also  necessitate 
readjustment  of  the  running  time  and  the  right  of  way.  On  a 
well-handled  railway,  however,  the  train  despatcher  always 
knows,  for  all  practical  purposes,  where  every  train  is.  What- 
ever the  interruption,  accidental  or  designed,  sooner  or  later  the 
schedule  again  swings  into  force  and  every  part  of  the  equipment 
returns  to  the  balanced  condition  of  maximum  use  the  traffic 
warrants. 

So  it  is  in  the  well-managed  factory.     Getting  varied  ship- 


54 PRODUCTION   METHODS 

ments  out  on  time,  tracing  work  and  fitting  special  orders  into 
the  routine,  are,  after  all,  only  problems  in  routing — or  assigning 
the  track;  scheduling — or  fixing  times;  and  despatching — or 
issuing  instructions  to  proceed.  Through  the  orders  issued  from 
his  office  and  the  reports  he  receives  on  train  movements,  the 
train  despatcher  holds  his  traffic  under  control.  When  control  is 
lost,  disaster  is  likely  to  follow.  In  the  factory,  likewise,  through 
orders  issued  to  foremen  and  workmen,  in  connection  with 
reports  received  from  them,  the  manager  controls,  rearranges 
and  expedites  work.  Cost  and  output  are  right  or  wrong,  other 
conditions  being  equal,  as  this  control  is  close  or  loose,  strong  or 
weak. 

Just  as  "train  sheets"  is  a  despatcher 's  office  help  to  control 
the  movements  of  trains,  so  similar  methods — some  of  them 
simple  and  graphic  and  others  filling  intricate  record  sheets, — are 
central  in  importance  to  the  control  of  manufacturing  in  many 
plants.  By  their  means  the  production  clerk  has  before  him 
constantly  the  place  of  every  order  in  the  routine.  Some  of  the 
parts  needed  for  assemblage  of  product  may  lag  behind  the  rest ; 
he  gets  in  touch  with  the  tardy  department  and,  by  means  of 
extra  forces  or  overtime  work  if  necessary,  brings  it  up  to 
schedule.  When  new  work  comes  in,  it  is  evident  in  the  same 
way  what  departments  are  on  schedule  and  where  a  new  order 
will  best  "sandwich  in." 

SIMPLE  GRAPHIC  SYSTEMS  FOR  FACTORIES 
MAKING  TO  STOCK 

CTOEY  work,  from  the  production  clerk's  viewpoint,  of 
course  divides  into  two  principal  classifications,  stock  and 
special  or  job  orders.  How  the  former  are  handled  is  the  first 
and  the  basic  problem. 

Stability  is  one  of  the  requisites  to  efficient  production.  The 
steadier  the  flow  of  work  the  year  round,  in  the  smooth  channel 
of  uninterrupted  routine,  the  more  effective  is  the  working  force 
and  the  lower  the  cost  to  make.  To  insure  this  condition  in  the 
face  of  a  variable  demand  from  consumers  can  be  done  in  only 
one  way — by  making  to  stock.  The  result  is  the  same  as  from 
storing  up  water  in  a  reservoir — it  equalizes  the  flow  of  work 


In  a  metal-working  plant,  operations  are  listed  down  the  side  of  a  production  record  board  (above), 

and  headings  for  jobs  are  placed  across  the  top.     Plain  and  colored  pegs  indicate  the  progress  of 

the  work.     At  the  Dodge  Manufacturing  plant  a  box  rack  contains  the  tracing  cards  (on  all  district 

orders),  to  be  attached  to  all  castings  as  soon  as  they  are  ready  to  leave  the  foundry 


On  this  planning  board  the  assignment  and  routine  of  work  is  scheduled  for  months  ahead.  Different 
colored  tags  aid  the  eye  in  recognizing  at  a  glance  the  stage  any  task  has  reached.  Lapping  tags 
upon  one  another  economizes  space,  and  "cut-outs"  permit  notations  on  under  tags  to  be  read  without 

removing  the  upper  one 


MAKING  TO  STOCK 57 

and  provides  a  steady  load  on  the  organization  in  spite  of 
fluctuations  in  the  stream  of  orders.  Not  only  does  it  permit 
large-lot  production,  'but  it  also  is  indispensable  to  perfectly 
scheduled  operation.  The  most  efficient  factories  are  thus  able 
to  conform  more'  closely  to  these  two  virtually  interdependent 
principles — working  to  stock  and  working  to  schedule.  Standard- 
ized operation  and  uniform  costs  otherwise  can  only  be  approxi- 
mated. 

In  recognition  of  these  principles,  many  "  order "  factories 
have  been  striving  to  get  on  a  stock  basis.  There  are  still  people 
in  most  communities  who  can  recall  when  every  farmer  brought 
his  own  corn  to  the  mill  for  meal,  but  now  the  entire  equipment 
of  many  new  plants  is  based  on  a  uniform  demand  carefully 
investigated  before  manufacture  begins.  Even  such  concerns 
as  the  Link-Belt  Company,  which  class  primarily  as  job  or 
engineering  shops,  are  stock  propositions  up  to  the  point  of 
assembling.  While  making  to  stock  offers  the  manufacturer 
exceptional  opportunities  for  economy,  however,  unless  produc- 
tion is  carefully  planned  and  adjusted,  with  finished  stock  storage 
to  meet  trade  demands,  neither  the  expected  economy  nor  reason- 
able satisfaction  of  promised  shipping  dates  will  result. 

So  it  is  customary  in  plants  making  to  stock,  for  the  production 
and  sales  departments,  if  possible,  to  schedule  the  work  at  least 
six  months  ahead  and  to  adhere  closely  to  this  program.  Under 
this  arrangement  the  problem  of  keeping  production  in  balance 
and  investment  busy  is  at  its  simplest.  An  inventory  record  of 
finished  parts  and  completed  assemblies  suffices  to  keep  the  pro- 
duction clerk  informed  on  the  progress  of  the  work. 

The  factory  assembles  a  definite  number  of  the  product  each 
day  and  the  rate  at  which  parts  are  made  is  fixed  solely;  by 
economical  size  of  lots.  The  frequency  of  orders  for  any  part  is 
governed  automatically  by  the  minimum  limits  prescribed  on  its 
inventory  card.  Apply  such  a  plan  to  one  highly  specialized 
product,  such  as  the  Ford  or  Franklin  automobile,  and  you  have 
perhaps  the  ideal  manufacturing  proposition. 

At  the  Franklin  plant,  the  entire  production  is  controlled  by 
a  series  of  graphic  stock  boards  (Page  73).  By  moving  a  grad- 
uated tape  over  a  series  of  blocks  which  represent  stages  in  the 
production  of  each  lot  of  parts,  a  perpetual  inventory  of  goods 


58 


PRODUCTION   METHODS 


in  process  is  furnished.  Orders  to  produce,  materials,  new 
drawings  and  tools — all  are  controlled  by  these  boards,  which 
once  set  remain  fixed  for  the  six  months  the  schedule  runs.  So 
reliable  is  this  record  that  photographs  of  it  are  accepted  by  the 
auditors  as  an  actual  inventory  of  parts  in  process. 


w 

T 

seUy  Production       Joo 

Production  Schedule 

Hickory  Gas  Range 

Ott 

Jan.  4.   1915 

tal  flriter       2000 

Nam 

&f. 

NAME  OF  PART 

Jan. 

Feb. 

March 

April 

May 

10 

3-7 

24 

31 

7 

14 

21 

28 

7 

H 

21 

28 

4 

11 

11 

K 

2 

9 

16 

23 

30 

Q 

Angle  Iron  Bands 

Angle  Iron  Splice 

Asbestos  Holder 

Body 

Body,  Lower 

Body,  Sides 
Body,  Back 

Body,  Top 
Body,   Base  Strip 

Body,  Lining  Support 

O 

Body,  Collars 

FORM  XI:  To  keep  supply  three  weeks  ahead  of  demand  is  the  aim  of  the  stove  company  using 
the  graphic  record  here  shown.  By  it  shortages  are  avoided  and  overstocking  prevented.  Ine 
weekly  quota  is  entered  at  the  top.  Once  a  week  this  record,  which  is  kept  in  a  loose-leaf  binder, 
ia  brought  up  to  date  by  tracing  the  horizontal  lines  for  each  part.  The  condition  of  stock  on  any 

order  is  at  once  apparent 

Such  graphic  methods  of  control  have  a  strong  appeal,  par- 
ticularly to  the  man  in  the  shop.  To  him  records  that  require 
the  frequent  use  of  the  pencil,  or  the  deciphering  of  someone 
else's  handwriting,  are  in  general  distasteful.  Moreover,  they 
waste  his  time.  Even  clerically  trained  men  evince  a  strong 
preference  for  graphic  records.  As  a  stock  record  clerk  once 
said:  "It  is  more  like  play  to  operate  them." 

At  the  Hart-Parr  plant  is  found  another  excellent  example  of 
graphic  control  of  stock  production.  In  the  finished-parts  stor- 
age, a  bead  rack  (Frontispiece)  enables  the  man  in  charge  to  keep 
close  and  accurate  tab  on  the  production  of  parts  and  their 
delivery  from  the  machine  shop  or  raw  material  storage.  Accord- 
ingly, when  he  receives  orders  from  the  main  office  to  issue  parts 
to  the  assembling  department  to  apply  on  a  certain  lot  order, 


MAKING  TO  STOCK 59 

he  can  see  at  a  glance  just  what  he  has  on  hand  and  how  many, 
if  any,  complete  sets  of  parts  he  can  issue  for  assembling. 

Farm  tractors,  are  manufactured  in  this  plant,  in  lots  of 
twenty-five  or  multiples  up  to  one  hundred.  It  is  of  course  the 
endeavor,  by  means  of  a  planning  board  operated  in  the  machine 
shop,  to  have  all  the  parts  that  apply  on  an  order  number  made 
up  and  delivered  to  the  erection  stores  simultaneously  in  so  far 
as  is  practicable. 

As  the  parts  are  delivered  the  storekeeper  moves  over,  on  the 
line  opposite  the  part  number  on  the  rack,  beads  to  correspond. 
There  are  in  all  four  racks,  one  for  each  type  of  tractor  produced. 
Parts  delivered  are  identified  by  lot  number  and  this  is  marked 
with  chalk  on  a  small  bit  of  blackboard  projecting  above  the 
rack  like  a  flag. 

At  the  top  of  the  rack  is  a  scale  graduated  in  one  hundred 
parts.  The  unit  of  graduation  is  the  width  of  a  bead.  A  pointer 
slides  along  this  scale  and  from  it  is  suspended  a  plumb  line. 
This  is  moved  to  keep  pace  with  the  delivery  of  the  part  or 
parts  most  backward.  Every  tenth  bead  is  white  in  color  and 
of  slightly  larger  diameter  than  the  darker  colored  intervening 
counters.  This  facilitates  the  operation  of  the  rack. 

Thus  at  a  glance  it  is  plainly  evident  how  many  tractors  in 
any  lot  can  be  erected  at  once,  provided  it  is  desired  to  begin 
erecting  in  advance  of  the  completed  delivery  of  the  lot.  If 
more  than  this  number  of  tractors  is  wanted,  the  storekeeper  can 
start  tracers  after  the  laggard  parts. 

By  this  means  one  man  in  the  shop  is  enabled  not  only  to 
control  simply  and  practically  the  operation  of  the  final  depart- 
ment, but  also  to  apply  the  pressure  necessary  on  preceding 
departments  to  keep  production  in  balance. 

Entries  of  parts  as  received  are  also  made  on  a  five-by-eight 
card  form,  but  this  is  for  the  information  of  the  office  and  is 
returned  to  it  as  the  notice  of  completion  of  the  order  and  giving 
the  final  information  necessary  to  close  the  office  production 
record. 

This  scheme  of  graphic  control  has  a  wide  application  in 
industries  that  make  to  stock.  It  is  scarcely  practicable  where 
the  line  is  large,  and  where  a  great  number  of  different  kinds 
of  products  are  coming  through  at  the  same  time,  for  too  many 


60 PRODUCTION  METHODS 

racks  would  be  necessary.  But  where,  as  in  this  instance-,  the 
line  is  highly  specialized  and  the  variation  in  pieces  is  chiefly  in 
size,  making  possible  practically  a  uniform  classification  of  parts, 
it  is  difficult  to  conceive  of  a  simpler  and  more  efficacious  means 
of  control. 

In  a  number  of  factories  similar  stock  records  are  operated  on 
large  blackboards.  At  the  Cincinnati  Shaper  Company,  for 
example,  production  is  controlled  from  six  large  blackboards, 
arranged  in  two  groups  of  three  each  separated  by  a  wall  column, 
each  board  moving  in  an  independent  set  of  grooves  like  a  window 
sash  and  the  three  when  spread  out  encompassing  the  entire 
story  height.  In  another  instance,  similar  boards  are  swung  like 
the  leaves  in  a  book  from  an  interior  column,  and  in  a  third  the 
boards  are  arranged  to  slide  horizontally  and  when  not  in  use 
are  nested  in  a  large  cabinet  against  the  wall.  The  latter  plans 
are  preferable  to  the  first  in  that  both  sides  of  the  blackboards 
are  available  for  records,  although  the  first  arrangement  has 
the  merit  of  being  more  graphic. 

Any  scheme  based  on  the  use  of  blackboards  or  bead  racks, 
however,  is  defective  in  that  the  record  may  easily  be  tampered 
with  and  no  permanent  record  of  each  change  in  the  quantities 
is  provided.  For  inventory  purposes,  therefore,  a  separate  paper 
record  must  in  any  event  be  maintained.  The  only  apparent 
alternative,  as  at  the  Franklin  plant,  is  to  photograph  the  board 
or  rack  every  time  the  figures  are  changed  and  so  closely  to 
supervise  it  between  times  as  to  insure  against  irregular  changes. 

LOOSE-LEAF  PRODUCTION  RECORDS  THAT  HOLD 
DEPARTMENTS  TO  SCHEDULE 

I  N  MANY  plants  the  requirements  of  schedule  control  are  more 
difficult.  Permanent  records  are  required.  Many  varieties 
of  goods  may  be  manufactured.  It  may  be  impossible  to  keep  to 
schedule  at  all  times,  but  is  necessary  to  have  the  system  flexible 
enough  to  allow  for  rush  and  special  orders.  Such  are  the  con- 
ditions at  the  plant  of  Rathbone,  Sard  &  Company. 

Stoves  are  the  output  of  this  company — both  cast-iron  for  coal 
and  sheet-metal  for  gas  and  oil — and  in  each  line  the  number  of 
styles  is  large.  The  typical  stove  has,  moreover,  upwards  of  a 


MAKING  TO  STOCK 


61 


hundred  parts.  As  the  problem  of  keeping  production  in  balance 
of  course  grows  in  perplexity  as  the  number  of  articles  increases 
and  is  at  its  worst  when  orders  call  frequently  for  departures 
from  standard,  it  is  evident  that  to  control  this  supply  of  parts 
is  not  a  simple  matter. 

Practically  all  the  manufacturing  is  to  stock  and  the  aim  is  to 
keep  the  supply  three  weeks  ahead  of  demand.  So  the  problem 
resolves  itself  into  controlling  the  shortages  and  avoiding  any 
considerable  overstock. 


«ecord  of  Production  and  Shipments 


/fill 


Cab  Done 


Finished 


Shipped 


-OnUnT 


7f 


44L 


Monthly  Statement 
Finished  and  Assembled  Stock  on  Hanij 


FORMS  XII  and  XIII:  In  controlling  the  output  of  a  plant  employing  one  hundred  men,  an  eastern 
furniture  company  uses  the  statement  shown  in  the  lower  form.  It  is  made  up  quickly  from 
an  inventory  record  such  as  that  described  in  this  chapter.  Another  furniture  company  controls 
output  largely  by  the  use  of  the  form  at  the  back,  which  is  a  record  of  production  and  shipments. 
These  sheets  are  easily  kept  in  a  spring-back  binder  at  the  manager's  desk 

At  first  the  management  attempted  to  handle  the  matter  by 
means  of  open  board  charts.  On  account  of  the  number  of  these 
required,  however,  the  scheme  was  shortly  abandoned  and  a  loose- 
leaf  record  substituted,  in  which  the  principle  of  graphic  pre- 
sentation still  appears.  One  of  these  production  sheets  (Form 


62 PRODUCTION  METHODS 

XI)  is  made  out  for  each  style  of  stove  or  range  upon  which 
production  is  started.  At  the  top  is  entered  the  weekly  quota 
which  the  capacity  of  the  plant  will  permit.  The  date  the  order 
is  started  is  entered  at  the  right.  The  total  order  divided  by 
the  stipulated  weekly  production  gives  the  number  of  weeks  over 
which  the  lot  will  be  coming  through.  The  vertical  columns  are 
then  dated  in  accordance. 

At  the  left  columns  are  provided  for  the  names  of  the  various 
parts  and  for  number  of  each  required  to  a  stove.  The  horizontal 
lining  is  correct  for  single  typewriter  spacing,  so  that  the  names 
may  be  typed  in  if  convenient.  The  order  of  parts  is  the  same 
as  on  the  master  production  order,  which  facilitates  reference 
from  one  to  the  other. 

Assembling  is  not  started  until  the  three  weeks'  supply  of 
parts  has  been  accumulated,  and  from  that  time  on  is  at  the  same 
rate  as  production,  unless  an  unusually  large  order  is  placed  for 
that  particular  stove.  In  this  case  the  daily  quantity  to  be 
assembled  is  temporarily  increased. 

The  records  are  kept  in  loose-leaf  binders  and  are  in  charge  of 
the  production  clerk.  Once  a  week  he  goes  through  each  schedule 
and  brings  it  up  to  date. 

Instead  of  entering  any  figures  or  check  marks  he  traces  a 
heavy  horizontal  line  for  each  part.  Thus  he,  or  anyone  con- 
sulting the  record,  can  see  at  a  glance  the  condition  of  stock  on 
any  manufacturing  order.  The  production  clerk 's  chief  concern, 
of  course,  is  shortages,  and  as  soon  as  any  line  falls  short  of 
three  weeks  ahead,  special  attention  is  given  to  this  item. 

A  list  of  parts  behind  schedule,  known  as  the  "short-call,"  is 
made  up,  the  period  short  in  each  case  being  stated.  The  pro- 
duction clerk,  with  this  list,  then  refers  to  the  master  production 
orders  to  see  whether  or  not  manufacturing  is  in  process  on  the 
short  parts.  If  the  record  shows  that  these  have  been  started,  he 
next  consults  what  is  called  a  ' '  labor  efficiency ' '  record,  by  which 
he  learns  how  far  along  the  manufacture  is.  He  makes  the 
proper  notes  on  the  " short-call"  and  then  gives  it  to  the  fore- 
man of  the  initial  department.  At  the  same  time  production 
orders  are  issued  for  starting  parts  not  already  in  process  and 
from  day  to  day  these  shortages  are  followed  up  and  urged 
through.  The  production  clerk,  if  need  be,  goes  into  the  factory 


MAKING  TO  STOCK 


63 


It 


rt». 

11 

c  S3 


II 


1= 

g.a 


64 PRODUCTION  METHODS 

in  person  and  follows  the  parts  upon  which  delivery  is  most 
backward. 

By  this  means  one  man  can  easily  keep  the  entire  production 
in  fair  balance. 

The  task  would  be  easier  were  it  not  for  the  number  of  special 
orders  received.  A  salesman  from  one  territory  writes  in  and 
wants  this  feature  altered  to  enable  him  to  land  a  promising 
order ;  another  writes  in  and  wants  some  other  feature  changed, 
perhaps  on  the  same  stove.  Then  the  part  or  parts  to  be  replaced 
must  be  laid  aside  and  substitutes,  of  the  required  special  design, 
rushed  through.  Inevitably  the  result  is  a  continual  upsetting 
of  the  balance.  Immediately  there  is  an  oversupply  of  the  part 
changed  and  an  emergency  shortage  of  the  new  piece. 

These  difficulties,  of  course,  the  chart  cannot  handle.  A  special 
follow-up  must  become  responsible  for  the  completion  of  the 
new  pieces,  as  indicated  in  the  next  chapter,  and  a  record  of  the 
oversupply  sent  to  the  production  clerk,  so  that  he  can  subtract 
it  from  the  quota  of  that  part  when  he  places  his  next  stock 
order.  But  the  schedule  is  a  great  help,  and  has  been  the  means, 
through  better  control,  of  considerably  increasing  output  and 
reducing  costs.  More  important  still  has  been  the  better  satis- 
faction given  the  trade.  Failure  to  ship  on  time  is  the  cardinal 
sin  in  distributing  a  product.  Under  this  plan,  the  office  closely 
controls  production,  and  promises  to  salesmen  are  based  on  exact 
knowledge. 

Almost  identically  the  same  control  plan  is  employed  by  the 
Thomas  B.  Jeffery  Company.  An  additional  feature  of  interest  is 
the  carrying  of  the  balances  right  on  the  chart,  so  that  no  refer- 
ence to  inventory  cards  is  necessary. 

HOW  A  PRODUCTION  RECORD  GAVE  A  MANAGER 
A  NEW  GRIP  ON  HIS  FACTORY 

r>  ROKEN  promises  and  failures  to  meet  orders  promptly  almost 
wrecked  one  plant  which  was  not  shipping  on  time.  Popular 
priced  cabinet  and  bedroom  furniture  is  the  output  of  this 
factory.  As  the  business  had  grown,  the  manager,  trying  to  get 
along  with  as  little  "red  tape"  as  possible,  had  found  it  increas- 
ingly difficult  to  control  his  production.  Manufacture  was 
almost  entirely  to  stock  and  the  slight  variations  were  unim- 


MAKING  TO  STOCK 65 

portant.  But  this  or  that  pattern  would  suddenly  run  out,  and, 
pending  the  execution  of  a  rush  order,  shipments  had  to  be  held 
up.  Every  now  and  then  a  good  customer  would  lose  patience 
at  this  delay  and  withdraw  his  patronage. 

So  large,  moreover,  had  the  number  of  rush  orders  for  stock 
designs  become  that  the  shop  was  disorganized.  Hardly  an  order 
for  manufacture  to  stock  pursued  its  way  uninterrupted.  Even- 
tually production  would  be  completed  on  the  majority  of  these, 
but  always  the  side-tracking  of  an  order  meant  a  congestion  of 
the  floor  space,  which  further  handicapped  operations.  All  too 
frequently,  parts  thus  side-tracked  would  fail  to  resume  their 
journey.  When  these  pieces  were  needed  for  assembling,  on 
hasty  search  they  often  would  not  be  found.  In  this  case,  the 
recourse  as  usual  was  a  rush  order.  So  it  went  on  from  bad  to 
worse,  and  in  proportion  as  the  confusion  increased,  profits 
dwindled  in  spite  of  mounting  sales. 

Finally  the  management  consulted  a  production  expert.  He 
immediately  saw  that  the  business  had  grown  too  large  for  one 
man  effectively  to  control  it  without  the  aid  of  records,  no  matter 
how  familiar  with  the  details  or  how  able  he  might  be. 

So  he  set  about  devising  a  simple  production  scheme,  by  means 
of  which  the  executive  could  regain  his  grip  on  the  factory. 
Several  forms  were  required,  including  a  new  manufacturing 
order,  an  identification  ticket  to  accompany  work  through  the 
mill,  individual  time  notes  for  the  men,  and  departmental 
delivery  records  to  check  the  forwarding  of  parts  from  one 
department  to  the  next.  The  pivotal  form,  however,  was  a  record 
of  production  and  shipments  (Form  XII). 

This  sheet  is  ten  by  seventeen-and-a-quarter  inches,  ruled 
and  identical  on  both  sides,  with  the  exception  of  the  topmost 
column  headings.  These,  on  the  one  side,  are  from  January  to 
June,  and  on  the  other,  from  July  to  December.  There  is,  of 
course,  a  sheet  for  each  pattern  manufactured  and  these  are  kept 
in  a  spring-back  binder,  classified  according  to  articles.  For 
instance,  all  the  chiffoniers  are  together,  and  all  the  buffets. 

The  first  five  columns  explain  themselves.  The  next  four 
columns,  under  the  secondary  heading,  "Cabinet  Work  Done," 
are  provided,  the  first  for  the  date  and  the  other  three  for  the 
quantities  finished,  bases  (B),  standards  (S)  and  caps  (C)  being 


66 PRODUCTION   METHODS 

listed  separately — as  the  cabinet  work  and  also  the  finishing  is 
performed  separately  on  these  three  sections,  which  only  finally 
come  together  in  the  shipping  room.  If  there  is  but  one  section 
to  the  final  piece,  only  the  first  column  is  used. 

Four  similar  columns  follow  under  the  secondary  heading, 
"  Finished. "  Quantities  here  listed  are  available  for  immediate 
shipment  if  necessary,  but  ordinarily  go  into  stock. 

The  next  single  column  contains  the  days  of  the  month,  num- 
bered from  one  to  thirty-one,  and  fixes  the  position,  according 
to  date,  of  all  quantities  posted  to  the  right  of  it. 

Then  follow,  under  the  names  of  the  months,  six  groups  of 
columns  of  eight  divisions  each.  These  in  turn  are  arranged  in 
two  groups  of  four  divisions  each — one  for  the  listing  of  pieces 
shipped,  the  other  for  the  record  of  balance  on  hand.  The  first 
column  in  each  secondary  group  is  for  the  record  of  ' '  full ' '  pieces 
shipped  or  on  hand.  The  remaining  columns  are  for  the  separate 
accounting  of  bases,  standards  and  caps. 

This  record  affords  a  perpetual  inventory  of  the  entire  pro- 
duction. A  glance  shows  not  only  the  balance  on  hand  of  finished 
stock  but  the  quantity,  if  any,  in  course  of  production  at  each 
important  stage.  Maximum  and  minimum  limits  are  set  and 
when  the  balance  on  hand  reaches  a  minimum,  if  sales  orders 
are  continuing  to  come  in  at  the  regular  rate,  a  new  manufactur- 
ing order  is  issued. 

At  the  end  of  the  month,  by  adding  the  quantities  in  the 
"  Shipped "  column,  the  total  shipments  for  that  month  are 
obtained.  This  total  must  agree  with  the  shipping  room  records. 
By  subtracting  this  total  from  the  balance  on  hand  at  the  begin- 
ning of  the  month  (plus  pieces  delivered  to  finished  stock  that 
month,  if  any)  the  balance  on  hand  to  carry  forward  is  obtained. 
This  should  agree  with  the  final  figure  in  the  current  balance-on- 
hand  column. 

TAKING  CARE  OF  PRODUCTION  IN  THE  FACE 
OF  HEAVY  SEASONAL  DEMAND 

A  T  THE  foundation  of  every  successful  stock  manufacturing 

proposition  is  some  kind  of  an  inventory  record  of  goods 

finished  and  in  stock,  available  upon  requisition  of  the  sales 


MAKING  TO  STOCK 67 

• 

department.  This  in  its  simplest  form  may  be  identical  with 
the  form  used  for  controlling  the  balance  on  hand  of  raw  materi- 
als, supplies,  accessories  and  manufactured  parts.  And  it  need 
never  be  more  complicated  if  the  quantity  of  finished  goods  were 
always  equal  to  demands.  Most  lines,  however,  are  seasonable, 
that  is,  during  part  of  the  year  production  at  the  average  rate 
greatly  exceeds  the  demand,  while  for  a  short  period — perhaps 
two  or  three  months  twice  a  year,  goods  are  shipped  out  so 
rapidly  that  the  balance  on  hand  soon  vanishes  and  shipments 
have  to  be  promised  on  the  strength  of  goods  coming  through. 
It  is,  moreover,  desirable  so  to  determine  the  maximum  stock 
limit  as  to  bring  about  this  condition.  Less  money  is  then  tied 
up  in  finished  stock  on  the  average,  smaller  storage  capacity  is 
required,  and  a  wholesome  stimulus  is  imparted  to  the  entire 
factory  organization  when  the  crest  of  the  demand  is  reached. 
To  be  able  intelligently  to  promise  goods  not  yet  completed,  as 
well  as  closely  to  adjust  the  orders-to-produce  with  the  peak- 
demand,  it  is  in  any  event  practically  necessary  to  operate  an 
inventory  record  which  comprehends  the  entire  situation,  from 
orders  started  to  goods  stocked  or  shipped,  showing  at  every  stage 
the  quantity  of  the  product  in  process. 

Such  a  form  is  shown  in  Form  XIV.  It  is  an  eleven  by  four- 
teen sheet,  identical  on  both  sides  except  for  the  order  of  informa- 
tion at  the  top,  which  is  reversed  on  the  rear,  and  is  filed  in  a 
loose-leaf  ledger.  As  each  page  is  arranged  for  two  rows  of 
entries,  one  sheet  is  equal  to  a  single  record  four  times  its  depth, 
and  serves  for  a  long  period. 

At  the  left  is  a  series  of  columns  for  the  inventory  of  sales 
orders:  (1)  the  sales  number,  (2)  the  date  shipment  is  promised, 
(3)  the  date  actually  shipped,  (4)  the  quantity  ordered,  (5) 
cancellations,  if  any,  (6)  the  unfilled  orders  on  hand,  which  is 
the  balance  forward  plus  column  (4),  minus  columns  (5)  and 
(8).  Then  follow  the  columns  for  the  inventory  of  stock,  (7  and 
8),  the  shipments,  (9)  any  other  deductions  from  finished  stock 
(to  make  good  defective  ware  returned  or  when  a  piece  becomes 
damaged  after  going  into  stock),  (10)  the  stock  on  hand,  arrived 
at  by  subtracting  (8  and  9)  from  the  balance  "forward,  after  the 
fresh  stock  delivered  from  the  packing  department  has  been 
added  from  (7).  Finally  are  the  columns  for  the  Orders-in- 


68 PRODUCTION  METHODS 

Process.  The  balance  forward  (12)  minus  the  goods  reported 
into  stock  plus  the  new  orders  started  the  same  day  give  the 
number  of  orders  in  course  of  production.  At  the  extreme  right 
is  a  date  column  which  applies  to  all  the  rest,  except  the  dates 
of  shipment.  Column  (11)  is  common  to  the  Orders-in-Process 
and  the  Finished-Stock  Sections,  and  (7  and  8)  to  the  Finished 
Stock  and  Sales  Orders.  These  columns  might  have  been  repeated 
to  make  each  inventory  section  complete,  but  clerical  labor  is 
saved  and  a  more  compact  form  secured  by  the  arrangement 
shown.  Sections  might  also  have  been  included  for  the  balance 
in  other  departments  and  these  would  have  their  value  for 
inventory  purposes,  but  inasmuch  as  the  interval  between  orders 
issued  to  the  originating  department  and  delivery  to  stock  is 
fairly  constant,  the  record  of  orders  in  process  suffices  as  a  basis 
upon  which  to  promise  shipments  when  the  crated  stock  runs 
low. 

At  the  top  of  the  sheet  are  various  blocks  for  the  complete 
identification  of  the  article  inventoried  below,  and  also  for  the 
maximum  and  minimum  stock  limits  upon  which  the  orders  to 
manufacture  are  based.  Both  limits  have  two  alternatives. 
When  the  stock  on  hand  sinks  below  the  minimum,  a  lot  order 
may  be  issued  for  a  specified  quantity,  or  if  it  is  a  tonnage  article, 
that  is  produced  so  many  each  day,  the  daily  quota  is  increased. 
On  the  other  extreme,  manufacture  is  either  discontinued  until 
further  notice  or  the  daily  output  is  decreased.  The  maximum 
possible  daily  output  is  another  fact  recorded  and  in  connection 
with  it  the  pattern  and  flask  equipment  for  that  particular 
article.  Thus  if  it  becomes  necessary  to  produce  more  than  the 
present  capacity  affords,  the  number  of  new  flasks  and  patterns 
required  is  apparent  at  a  glance.  The  average  casting  weight 
and  average  shipping  weight  are  two  other  recorded  facts  which 
have  their  value  when  a  statement  of  tonnage  produced  by  the 
foundry  or  shipped  out  has  to  be  made  up  in  a  hurry.  The 
plate  number  is  placed  in  the  upper  right-hand  corner  (upper 
left  on  rear),  and  the  sheets  are  so  filed,  dispensing  with  a 
separate  page  number  which  would  require  a  cross  index. 

This  form,  specially  devised  to  fit  conditions  in  an  enameled 
ironware  plant,  would  serve  with  detail  changes  in  any  factory 
making  a  non-assembled  product.  Even  in  a  parts  factory,  it 


MAKING  TO  STOCK 


would  do  for  the  final  assembling  operations;  but  additional 
records  on  the  same  order  would  be  necessary  for  each  part  pro- 
duced and  each  sub-assembly,  unless,  of  course,  orders  for  all 
the  parts  necessary  to  make  a  certain  quantity  of  assembled 
product  are  issued  simultaneously  and  assembly  is  not  started 
antil  these  parts  are  delivered.  Then  the  entire  record  can  be 
operated  on  one  sheet,  as  in  the  case  of  the  furniture  manu- 
facturer. 


VI 

SPECIAL  AND  MAINTENANCE 
ORDER  SYSTEMS 


SPECIAL  order  propositions  differ  radically  in  several 
respects  from  manufacture  to  stock.  From  the  latter,  the 
variables  of  execution  can  almost  entirely  be  eliminated. 
This,  in  fact,  has  been  pointed  out  as  the  main  compelling  force 
toward  stock  manufacture.  Not  so  the  purely  special  order 
proposition.  Here  the  variables  predominate.  Each  order  brings 
up  new  problems.  The  experience  of  today  may  afford  little  or 
no  guide  for  the  work  of  tomorrow. 

Before  the  shop  can  be  started  on  a  special  job,  extensive  and 
expensive  preliminary  work  may  be  necessary.  Some  designing 
and  drawing  are  always  to  be  done,  even  though  the  customer 
furnishes  fairly  detailed  plans  and  specifications.  Some  new 
patterns  and  tools,  too,  usually  are  required  and  in  the  extreme 
case,  an  entirely  new  outfit.  Facilities  frequently  prove  inade- 
quate and  additional  equipment  has  to  be  provided.  The 
required  materials  seldom  are  on  hand  and  some  of  these  may 
be  totally  strange  to  the  purchasing  department ;  hence,  the  buyer 
must  be  given  time  to  search  the  markets  and  obtain  quotations 
and  deliveries.  Considerable  experimental  work  may  further 
be  necessary  to  determine  the  proper  materials  or  to  check  the 
design  or  for  both  purposes. 

In  spite  of  all  these  indeterminates,  however,  the  cost  must  be 
estimated  and  the  date  of  delivery  promised.  If  under  such 
conditions  the  factory  comes  out  ahead  on  a  given  order  and 
does  not  lose  all  it  might  otherwise  make  in  penalties  for  tardy 
delivery,  it  may  consider  itself  fortunate. 

An  extreme  case  of  special  order  manufacture  has,  of  course, 


SPECIAL  ORDER  SYSTEMS 71 

been  stated.  The  majority  of  special  order  shops  have  standard- 
ized their  efforts  considerably.  They  confine  themselves  to  work- 
ing in  one  material,  as  leather,  wood,  iron,  or  brass,  or  to  certain 
general  types  of  product,  as  electrical  machinery,  material-hand- 
ling equipment  or  made-to-order  clothing.  Again,  there  is 
specialization  within  each  of  these  branches.  For  example,  one 
firm  may  limit  itself  to  sheet-metal  products,  another  to  crucible- 
steel  castings,  a  third  to  machine-shop  work.  By  narrowing  their 
efforts  in  this  way,  job  shops  in  time  accumulate  a  wealth  of 
experience  in  their  special  lines  which  enables  them  to  eliminate 
many  of  the  variables  and  closely  control  the  rest.  New  orders 
are  gaged  by  comparison  with  former  ones,  which  differ  only  in 
size  or  minor  details.  Indeed,  many  special  order  factories  today 
are  special  only  as  to  certain  details  of  their  product.  Moreover, 
these  factories  whose  lines  at  no  point  admit  of  making  to  stock 
are  more  and  more  centering  their  sales  efforts  on  getting  a  class, 
of  work  that  suits  their  facilities,  and  when  special  jobs  requiring 
extensive  special  preparation  are  accepted,  it  is  with  the  under- 
standing that  neither  the  price  nor  the  date  of  completion  will 
be  guaranteed. 

SPECIAL  ORDERS  IN  EVERY  FACTORY— FOURTEEN 
PRINCIPLES  THAT  APPLY 

/~\N  the  other  hand,  not  even  the  purely  stock  factory  is  wholly 
without  the  special  order  problem.  In  its  maintenance  and 
betterment  work,  if  nowhere  else,  this  class  of  order  is  always 
present.  Then,  too,  practically  every  stock  factory  has  a  certain 
amount  of  customers'  repairs,  and  few  occupy  so  commanding 
a  position  that  they  are  not  obliged  occasionally  to  vary  their 
standard  product  in  some  degree  to  suit  the  special  requirements 
of  a  customer  whose  valued  and  important  patronage  might  other- 
wise go  elsewhere. 

So,  then,  methods  of  handling  special  work  have  a  very  general 
interest.  These  may  be  stated  as  the  principles  governing  the 
execution  of  this  class  of  orders : 

1.  Analyze  each  order  into  its  constituents. 

2.  See  what  drawings  and  patterns  on  hand  will  serve  as 

they  are. 


72 PRODUCTION  METHODS 

3.  See  what  drawings  and  patterns  on  hand  will  serve  with 

minor  changes. 

4.  Find  out  what  special  tools  will  be  necessary. 

5.  Find  out  what  new  or  additional  materials  it  will  be  nec- 

essary to  purchase,  and  place  orders  therefor. 

6.  Estimate  the  cost  and  time  of  each  operation  required, 

where  definite  standards  are  not  possible. 

7.  Time  orders  to  shop  in  accordance  with  dates  when  new 

drawings,  tools,  equipment  and  materials  will  be  ready. 

8.  Schedule  and  route  each  order  as  its  importance  and  the 

state  of  orders  already  in  the  shop  indicate. 

9.  Operate  a  close  follow-up  from  the  office  to  insure  that 

this  schedule  is  being  observed  strictly. 

10.  Sidetrack  orders  in  process  for  the  benefit  of  special  rush 

orders  only  on  the  highest  authority,  and  at  the  same 
time  see  that  orders  sidetracked  are  scheduled  anew. 

11.  Separate  stock  from  special  manufacture.    If  essentially 

a  stock  factory,  yet  required  to  fill  many  special  orders, 
set  aside  a  portion  of  each  department  for  the  latter. 

12.  Promise  delivery  conservatively,  and  if  you  see  you  can't 

make  it,  advise  customer  promptly. 

13.  Keep  an  accurate  record  of  the  time  and  nost  on  each  order 

and  compare  with  preliminary  estimates. 

14.  Grade  foremen  and  men  on  their  ability  to  keep  within 

the  estimates. 

These  principles  cannot  be  applied  without  reserve  in  every 
case,  nor  where  applicable  in  general  will  they  fit  certain  peculiar 
details  of  the  work  involved  in  getting  out  special  orders.  Design- 
ing, which  is  mostly  creative  effort,  for  instance,  cannot  be 
scheduled  definitely  nor  the  cost  absolutely  predetermined.  How- 
ever, even  in  this  case,  it  is  often  well  to  place  a  time  and  cost 
estimate  on  each  job,  if  for  no  other  reason  than  to  impress  upon 
the  minds  of  the  designers  that  these  items  count.  Also,  when 
limits  are  prescribed,  thought  is  stimulated  and  many  times  a 
higher  grade  of  intellectual  effort  secured.  If  such  work  is  not 
scheduled,  a  promise  at  least  should  be  obtained  from  each  man 
and  a  close  follow-up  operated  on  the  promises. 

So  the  need  for  system,  in  a  special  order  factory,  begins  in 
the  drafting  room,  as  the  definite  planning  of  an  order  cannot 
be  done  until  the  engineering  work  is  completed.  The  systen? 
need  not  be  complicated — the  main  essentials  are  that  the 
executive  know  definitely  the  whereabouts  of  each  order  and  its 
status  at  all  times,  and  that  a  tentative  schedule  at  least  be 


Manufacturing  to  stock  is  regulated  automatically  by  highly  organized  control  boards  at  the  Franklin 

Automobile  Company's  plant.     Each  horizontal  half-inch  represents  a  working  day.     Block  symbols 

(below)   and  a  movable  tape  (left,  above),  schedule  every  operation.     The  boards  are  photographed 

for  permanent  records,  and  the  prints  are  accepted  as  inventory  statements  of  work  in  process 


Typical  production  short  cuts  are  here  shown.     In  making  silk  bags  (above),  to  contain  smokeless 

powder  for  the  guns  of  the  United  States  Navy,  bottoms  and  caps  are  cut  out   in  quantity  by  an 

electric  blade.     Stock  for  the  job  in  process  and  for  the  job  next  ahead  is  held  in  semi-circular  racks 

(middle).    A  belt-conveyor  determines  the  rate  of  production  in  the  packing  department  below 


SPECIAL  ORDER  SYSTEMS 75 

observed.  If  some  graphic  means  of  control  can  be  devised,  so 
much  the  better. 

A  particularly  good  example  of  this  kind  of  control  is  in  use 
by  the  Norton  Grinding  Company.  A  detailed  report  is  required 
every  day  on  all  the  orders  in  process  in  the  engineering  depart- 
ment. Near  the  chief  engineer's  desk  is  a  large  peg-board  (Page 
55),  which  is  a  graphic  reproduction  of  the  report  sheet.  It  is 
divided  like  cross-section  paper,  and  in  the  center  of  each  square 
is  a  peg  hole.  At  the  left  and  right  extremes  are  tabs  for  the 
listing  of  the  various  operations  on  an  order,  while  across  the 
top  are  other  tabs — one  above  each  vertical  row  of  squares — 
for  the  designation  of  the  orders.  The  tabs  are  little  metal 
frames  into  which  are  slid  slips  of  paper.  The  board  is  divided 
into  sections  according  to  the  several  kinds  of  engineering  work 
handled — original  design,  special  design,  general  design  and 
otherwise. 

Once  each  day  a  department  clerk  goes  to  the  various  division 
heads  in  the  engineering  department,  who  have  different  jobs 
under  their  supervision,  and  learns  from  each  engineer  what 
work  has  been  done  since  the  last  report.  Returning  to  the  board, 
the  clerk  inserts  pegs  in  accordance.  Thus  the  board  shows  at 
all  times  the  status  of  every  job  in  the  department  within  twenty- 
four  hours  and  it  can  be  worked  as  much  closer  as  is  desired.  The 
heads  of  the  pegs  are  large  enough  so  that  the  date  of  each  opera- 
tion can  be  marked  on  them  and  where  orders  run  for  two  months 
or  longer,  different  colored  tops  are  employed  to  distinguish  the 
months  at  a  glance.  Another  interesting  plan  board  carries 
colored  cardboard  disks  which  flag  the  unfinished  work — the 
danger  points — and  are  cleared  away  as  manufacture  proceeds. 
These  schemes  are  not  limited  to  control  of  engineering  work,  but 
may  be  extended  to  include  all  the  operations  in  a  factory  and  in 
almost  any  kind  of  business. 

FOLLOWING  SPECIAL  WORK  BY  CONTROL  BOARD 
AND  ORDER  COUPONS 


CTILL  another  type  of  board  which  has  a  broad  application  is 

in  use  in  the  same  ironware  plant  referred  to  in  the  preceding 

chapter,  and  was  devised  to  give  better  control  over  orders  for 


76 


PRODUCTION  METHODS 


Sates  Order 

Date 

knttre 

4 

Diti  Shlpp 

id                   Customer                   Their  Ordir  Ho.              Our  Ordir  Ni. 

BUI  of  Material 

Ar 

licit 

Orai 

rlniNo.                Specification  No.                     O'lti                 By 

Kin 

| 

No. 

| 

Part 

Symbol      |      Mitirlal         Drawing  No.     Spiclflcatloi)  No.  |       Remarks 

— 

1 

7 

Out 

erNo 

Manufacturing  Order  and  Route  Sheet 

— 

3 

Part 

I     " 

mtol                  Ordir  Na        I   Specification  No.             Issued          I      To  Bo  Oono 
J                      .                                  I 

—  I 

4 

ItllT 

0 

».r.t 

M                S 

rmM             MieklmNo.    |  $Und«rdTlmi  |    Actual  Timo         %  Eftlclmcy        an. 

- 

5 

1 

2 

Ord! 

rNo. 

Manufacturing  Order  and  Route  Sheet 

1 

3 

Pan 

Symbol                Ordir  No.           Specification  No.            issued          I      To  bo  Oono 

Him 

I  ( 

feeratto. 

Syrtol        j    MatMM  No.      .  Standard  Tlmo  j    Actual  Tlnii         %  Etflclincy       0.  K. 

— 

1 

5 

« 

Instruction  Card 

I 
10 

6 

1 
| 

Op 

iritlM 
No. 

D~crW«,                                                          SS* 



tt 

4 

12 

5 

Stores  Delivery  Order 

13 

9 

10 

6 

Oi 

to                      DottrorrtTo                         By                  SlftH 

11 

.  1 

IS 

1 

Tools  Delivery  Order 



IS 

13 

9 

— 

Oil.                        Delivered  T»                        By                     SiCned 

— 

11 

14 
IS 

10 
It 



—  _ 

Move  Ticket                         OrdorNo. 

1} 

TO 

IS 

12 

Mno                                                                 To 

— 

21 

17 

14 

Order  Na 

Order  to  Assemble 



22 

i; 

Ooto                        ArUdo                    To  Bo  Oono            Slgnod 

71 

19 

_ 

24 

20 

17 

— 

Instruction  Card 

25 

21 

IB 

Operation                                                                                                                                                    TbM 
No.                                                             Do»ertitlo«                                                          Mtmtt 

28 

19 

27 

20 

28 

— 

[_ 

r» 

Mm  Ticket                      OrdorNo. 

Mov* 

To 

.    ""*            ;                                 Shorter 

Custonofs  Ordor  No.  1          SUp  ky                   Ooto  Shlppod         Slfnod 

Packlai  Intructlwi: 

'     •MM.lkm- 

: 

FORMS  XVI-XXVII:  Special  orders  require  many  more  forms  than  stock  orders.  All  of  the 
essential  forms  for  carrying  on  production  under  special  orders  are  here  shown.  Stock  orders  require 
only  the  manufacturing  and  assembly  orders,  stores  and  tool  delivery  tickets  and  the  shipping  order. 
Bills  of  material,  drawings  and  specifications  are  on  file.  In  case  production  is  steady,  procedure  ia 
still  simpler,  as  only  standing  orders  to  make  are  necessary 


SPECIAL  ORDER  SYSTEMS 


77 


specially  drilled  or  finished  fixtures.  This  control  board  is  dou- 
ble faced,  painted  black  and  supported  on  a  revolving  stand, 
so  that  it  may  be  swung  around  to  face  in  any  direction.  Like 
the  other  board  mentioned,  it  is  divided  into  rectangular  spaces 
and  a  small  brass  hook  occupies  the  center  of  each  space.  The 


/ 

Progress 

(o) 

Ticket 

I 

/  K  14c(S)            \ 

Return                Ticket 

IT" 

Sales  Na 

Order  Na 

Order  No  
"  O  Dei'd  to  En-Dept.  2nd  Time 

Detach  and  Return  When  Piece  Is  Del'd  to  En-D. 
d  Q  OrderNo  

1  Ret'd  to  CI-Dept 
°"  Detach  and  Return  When  Piece  1$  Ret'd  to  CI-D. 

Return  This  Stub 
When  Piece  Is 
loadedlln  Car 

Plate  No.  and  Size 

Due  in  Ship  D. 

O  ORDER  NO 

8                        OELIV 

Detach  and  Retur 

w    »  —  »    ••••««•••• 

O    ORDER  NO 
7                 OELIV 

Detach  and  Rfitui 

ERED  TO  SHIP-DEPT.                 j  
nWhenRiecelsDerdtoShip-Dj 

*  •-  «««»*«i*i«  ««-**•••  •  <•  JF  *  •  * 

............. 

ERED  TO  PAK-DEPT.                  i  
n  When  Piece  Is  DePd  to  Pak-ol 

f*\    ORDERNO 
g  ^          OELIV 
Detacti  and  Retu 

EREQTQDEC-DEPT.                  ,  
rn  When  Piece  Is  Del'd  to  En-0j 

Q    ORDERNO 
OEUV 
Detach  and  Retui 

EREDTO  FIT-DEPT. 
•n  When  Piece  Is  Del'd  to  Fit-D 

FORMS  XXVIII  and  XXIX:  To  route  and  trace  the  movement  of  pieces  on  a  special  order  is 
the  function  of  the  tag  at  the  left,  which  accompanies  each  piece  throughout  the  chain  of  operations. 
The  various  coupons  are  detached  in  turn  and  sent  to  the  office,  where  they  are  placed  on  a 
progress  board,  by  which  the  manager  can  tell  within  an  hour  or  two  the  exact  status  of  each  piece  on 
the  special  order.  The  tag  at  the  right  is  used  for  imperfect  pieces  in  the  same  plant 

steps  in  the  progress  of  any  order  are  listed  at  the  left — not  the 
operations,  but  the  points  of  transfer  from  one  department  to 
another  are  indicated.  Headings  across  the  top  are  unnecessary, 
as  the  first  coupon  of  the  routing  tag  (Form  XXVIII),  issued 
with  each  order  and  hung  on  the  top  hook,  carries  the  complete 
identification. 


78 


PRODUCTION  METHODS 


This  tag  is  made  up  of  coupons,  one  for  each  stage  in  the  execu- 
tion of  an  order.  It  is  prepared  at  the  same  time  the  production 
order  is  made  and  is  sent  with  the  first  copy  of  that  order  to 
the  originating  department.  The  bottom  coupon — "Order  Is- 
sued"— is  detached  when  the  tag  goes  out  and  hung  on  the  top 
hook.  As  many  tags  are  issued  as  there  are  pieces  on  an  order 
and  all  the  coupons  are  hung  from  the  same  hook. 

When  molding  is  started,  the  foundry  production  clerk  de- 
taches the  second  coupon — "  Started "  and  places  it  in  a  coupon 
box  in  the  department  office.  Here  it  is  found  by  the  mail  boy 


Production  Rscord 


For' 


to  Stock 


FORM  XXX:    Provision  for  checking  every  operation  is  made  in  the  production  record  he 

in  part.    The  original  is  extended  further  to  the  right,  and  each  step  in  manufacture  is   gven   a 


uction  record  here  shown 

in  part.    The  original  is  extended  further  to  the  right,  and  each  step  in  manufacture  is   given   a 
column.    The  exact  stage  of  any  order  is  indicated  by  the  presence  or  absence  of  check  marks  in 

the  various  columns 


on  his  next  round  and  delivered  to  the  progress-board  clerk  in  the 
office,  who  time-stamps  it  and  hangs  it  on  the  proper  hook. 

So  as  the  pieces  on  an  order  progress  from  department  to  de- 
partment, the  successive  coupons  are  detached,  reach  the  office, 
are  time-stamped  and  hung  on  the  board.  If  for  any  reason  a 
piece  is  thrown  out  in  process,  the  whole  of  the  tag  remaining  is 
sent  in  and  then  the  production  clerk  considers  whether  or  not  to 
issue  a  new  order  to  make  up  the  loss.  If  all  the  coupons  do  not 
come  in  promptly  and  a  loss  is  not  reported  in  the  manner  de- 
scribed, the  production  clerk  either  gets  after  the  delinquent 
/  department  by  telephone  or  goes  personally  into  the  factory.  He 


SPECIAL  ORDER  SYSTEMS 79 

knows  when  the  various  coupons  should  come  in  by  consulting 
daily  his  follow-up  file  of  production  orders,  on  which  each  stage 
of  the  work  has  been  scheduled.  When  a  piece  is  delayed  be- 
cause, after  reaching  the  enamelling  stage,  it  is  found  to  need 
more  grinding,  filing  or  sandblasting,  or  has  been  incorrectly 
drilled,  the  fact  is  reported  by  a  red  coupon  (Form  XXIX), 
which  the  inspector  who  orders  the  return  attaches.  A  second 
red  coupon  is  returned  when  the  piece  goes  forward.  When  the 
pieces  reach  the  shipping  department  and  are  loaded  into  the 
cars,  the  tag  stubs  with  the  clips  that  attached  them  to  the  ware, 
are  returned  and  the  hooks  are  then  cleared. 

Before  the  institution  of  this  method  of  handling  special  orders, 
the  sales  department  were  continually  on  the  heels  of  the  factory 
manager  with  complaints  about  the  tardy  progress  of  special 
orders  and  he  had  no  way  of  satisfying  them  except  by  telephon- 
ing various  department  foremen  or  going  out  personally  to  in- 
vestigate. The  sales  manager  or  one  of  his  assistants,  too, 
frequently  spent  an  hour  or  two  a  day  tracing  orders  in  which 
he  was  particularly  interested.  Now  the  manager  merely  glances 
up  from  his  desk  at  the  progress  board  and  the  sales  force  walk 
up  a  flight  of  steps  instead  of  going  on  a  long  journey  through 
the  factory.  Even  this  is  unnecessary,  as  failure  to  meet  shipping 
dates  is  now  the  exception  rather  than  the  rule. 

PUSHING  MAINTENANCE  ORDERS  AND 
ASCERTAINING  THEIR  COST 

j\/r  AINTENANCE  and  betterment  orders  in  the  same  plant 
were  also  put  on  a  correspondingly  systematic  basis.  For 
these,  a  special  service  order  form  was  first  devised.  This  is  pro- 
vided in  five  colors,  a  different  one  for  each  of  the  five  service 
departments — pattern  shop,  carpenter  shop,  machine  shop,  con- 
struction and  repair  department,  and  drafting  department,  with 
a  white  copy  for  the  office  follow-up.  Spaces  are  provided  on 
the  order  for  the  date  of  completion  and  the  estimated  time  and 
estimated  labor  and  material  costs,  with  parallel  columns  for  the 
actual  quantities.  Every  order  must  be  estimated  as  to  time  and 
cost  and  a  date  of  completion  stated,  whether  data  from  previous 
similar  work  is  available  or  not.  In  the  absence  of  data,  the  order 


§0 PRODUCTION  METHODS    

clerk  must  see  the  various  foremen  concerned  and  secure  esti- 
mates from  them,  before  he  can  issue  the  order.  Progress  is 
checked  by  placing  the  office  copy  of  each  order  in  a  follow-up 
file.  On  the  date  completion  is  specified,  a  foreman  must  either 
return  the  order  signed  as  finished  or  on  the  back  of  it  give  his 
reasons  for  needing  further  time.  His  copy  is  returned  with  a 
new  due  date  stated,  after  the  proper  notations  have  been  made 
on  the  office  copy. 

At  the  same  time  the  service  order  is  made  out,  a  cost  sheet 
is  prepared  (Form  XXXI).  The  upper  part  of  this  sheet  is 
identical  with  the  order,  permitting  the  use  of  a  carbon.  Monthly 
the  labor  and  material  charges  reported  against  a  service  order 
number  are  transferred  in  one  item  to  the  cost  sheet  and  when 
the  order  is  returned  as  completed,  the  record  is  closed  and  it  is 
the  work  of  only  a  few  minutes  to  calculate  the  cost.  This 
total  is  then  entered  on  the  appraisal  or  charged  to  the  proper 
expense  account,  depending  on  whether  it  is  a  betterment  or 
maintenance  order,  and  the  sheet  is  transferred  to  a  finished 
order  file.  A  marked  improvement  in  the  control  of  service 
work,  as  well  as  a  steady  reduction  in  cost,  resulted  from  the  in- 
stallation of  this  system. 

Almost  identically  the  same  scheme  is  in  operation  in  a  job 
brass  and  German  silver  mill,  for  handling  and  getting  the  cost 
of  each  order  from  the  point  in  production  beyond  which  every 
job  is  special.  This  is  from  the  scratching  room  on.  Up  to  this 
point,  the  mill  operates  on  a  stock  basis.  Bars  from  the  cast- 
ing shop  are  put  through  several  stages  of  rolling,  whereby  they 
are  lengthened  several  times  and  reduced  in  thickness.  Then 
before  further  reduction,  the  surface  must  be  cleaned,  or 
"scratched/'  Thus  it  is  convenient  at  this  point  to  stock  the 
bars. 

The  upper  portion  of  the  order  cost  blank  is  a  carbon  dupli- 
cate of  the  shop  order  on  which  stock  is  issued  from  the  scratch- 
ing room.  Each  order  is  further  identified  by  a  mill-order  tag 
(Form  XXXII),  the  lower  part  of  which  is  detached  and  re- 
turned to  the  office  when  the  material  is  issued.  This  coupon 
carries  a  duplicate  of  the  information  on  the  upper  part  of  the 
tag  and  is  the  follow-up.  In  the  blocks  shown,  the  various  com- 
\ 


SPECIAL  ORDER  SYSTEMS 


81 


pletion  dates  are  entered  from  the  workmen's  time  tickets.  On 
return  of  the  rest  of  the  tag,  the  two  parts  are  clipped  together 
and  placed  in  a  completed  job  file. 

MAINTAINING  THE  SCHEDULE  ON  SPECIAL  ORDERS 
FOR  BUILT-UP  PRODUCTS 


OPECIAL  orders  on  built-up  articles  present  a  more  difficult 
problem,  and  the  difficulty  increases  at  least  in  proportion 
to  the  number  of  parts.  This  is  because  a  separate  follow-up 
must  be  operated  on  each  part  and  simultaneous  delivery  effected 
on  all  the  parts  entering  into  an  assemblage.  The  problem  in 


0   §..j 

Construction  and  Repair  Order  Cost 

Cost  No. 

Expense  Symbol 

Date  Hnst8«  Out 

Quantity 

Size 

Description 

Date  Order  Issued 

Department 

Special  Instruction*: 

*      ' 

Ban  Station 

£$tlmated  Time 

Actual  Time 

Estimated  Labor 

Actual  labor 

Estimated  Material 

Actual  Material 

Appraisal  Pap 

Total 

Indirect 
Cost 

Drawing  No. 

Data  Computed 

Total 
Actual 
Cost 

Date 

Labor 

Expense 

Material 

1915 

xhw 

Amount 

% 

Amount 

Quantity 

Inscription 

Price 

Sri 

Outsitf 

Maten 

iH 

H 

Castings 

S 

:r== 

=^r-         .     -=: 

—  — 

c^,  1 

~\J 

FORM  XXXI:  By  having  the  upper  part  of  this  construction.and  repair  order  cost  sheet  identical 
with  the  order  form  itself  .both  can  be  made  out  at  the  same  time.    Note  the  provision  for  the  esti- 
mated time  and  cost,  for  comparison  with  the  actual.     By  carrying  out  this  feature  scrupulously, 
the  production  clerk  maintains  his  control  over  dates  and  costs 

the  majority  of  cases  is  of  course  simplified  by  the  fact  that 
many  of  the  parts  will  be  carried  in  stock  or  purchased  outside. 
Graphic  schemes  of  control  are  less  useful  under  these  condi- 
tions, although  a  chart  on  the  same  general  plan  as  the  produc- 


PRODUCTION   METHODS 


tion  plan  board  mentioned  on  Page  75  would  apply  to  many  such 
orders.  It  would  serve,  for  example,  when  all  the  parts  went 
through  practically  the  same  operations.  Omitted  operations, 


Promised         LettSc-Ro.          Shipped       InProc.   Tardy 


FORM  XXXII:  This  form,  designed  for  a  copper-alloy  mill,  serves  as  an  order  and  a  routing  tag 
from  the  cleaned  bar  stock-room.  The  lower  part  is  detached  when  the  stock  is  issued,  and  returned 
to  the  office,  where  it  serves  as  the  follow-up.  As  reports  are  received  on  the  progress  of  the  order, 
the  information  is  entered  in  the  blocks  below.  When  the  order  is  shipped,  the  top  is  returned,  the 
statistical  data  is  posted  and  the  entire  record  is  filed 

too,  could  be  indicated  by  a  different  colored  disk.     The  chief 
defect  is,  of  course,  that  no  record  is  maintained  of  the  dates  the 


SPECIAL  ORDER  SYSTEMS 83 

various  operations  are  completed.  A  scheme  based  on  the  use  of 
cards  and  date  signals,  therefore,  is  more  generally  acceptable. 

In  one  plant  cards  are  made  out  for  all  parts  and  filed  in 
sequence  in  a  tray.  Across  the  top  are  the  days  of  the  month. 
Parts  in  stock  are  indicated  by  one  color  of  signal,  those  pur- 
chased by  another  color.  The  latter  cards  are  set  according  to 
the  dates  the  material  will  be  available.  Similarly  other  colored 
tabs  are  placed  on  the  cards  for  parts  to  be  made  on  the  prem- 
ises, and  are  moved  forward  as  reports  are  received  indicating 
the  progress  of  the  work.  These  are  broader  tabs  of  white 
celluloid  and  the  proportion  or  number  completed  is  written 
on  in  pencil.  Thus  the  production  clerk,  merely  by  glancing 
through  his  file  of  cards,  can  tell  the  status  of  all  the  parts, 
time  his  orders  to  assemble  in  accordance  with  his  reports,  and 
if  production  is  lagging  on  any  parts,  send  out  tracers.  The 
proportional  rule  across  the  top  of  the  cards,  in  combination 
with  signals,  is  another  follow-up  device  for  both  stock  and 
special  orders. 

Still  another  variation  is  in  use  in  a  New  England  factory. 
Cards  are  made  out  for  all  parts,  just  as  above.  The  various 
operations,  however,  are  listed  vertically  along  the  top  edge  and 
the  signal  is  moved  forward  from  operation  to  operation  as 
these  are  reported  done. 

Sheet  records  are  also  in  use  in  a  number  of  plants.  All  the 
parts  comprising  an  assembly  are  listed  (Form  XXX)  at  the 
left.  The  first  column  to  the  right  is  headed  "Purchased  Out- 
side ;"  the  second,  "In  Stock ;"  the  third,  "Date  Order  Issued ;" 
and  fourth,  "Order  Number."  Heading  the  various  columns 
following  are  the  operations  in  sequence.  In  using  this  chart, 
the  first  step  after  ascertaining  what  parts  must  be  made,  is  to 
go  through  and  for  each  part,  to  cross  out  the  irrelevant  opera- 
tions. Lines  are  also  drawn  across  the  page  opposite  the  items 
in  stock  or  to  be  purchased,  to  make  parts  to  be  manufactured 
stand  out  more  prominently.  When  purchases  arrive,  a  circle 
or  other  suitable  symbol  is  drawn  around  the  check  mark  in 
the  first  column.  As  operations  are  reported  done,  the  dates 
are  entered  in  the  proper  spaces.  The  job  time  tickets  furnish 
this  notification,  Thus  the  production  clerk,  by  faithfully  oper- 


84 PRODUCTION   METHODS 

ating  this  record,  can  watch  production  closely,  follow  lagging 
parts  and  bring  his  orders  to  assemblage  on  accurate  schedule. 

HOW  TO  ORGANIZE  FOR  PERSONAL  FOLLOW-UP 
ON  RUSH  JOBS 

IN  an  Indianapolis  saw  factory  where  each  foreman  still  acts 

as  his  own  production  clerk,  a  "hurry  department"  is  main- 
tained which  well  illustrates  the  principles  of  personal  follow-up 
and  accurate  records  so  important  in  connection  with  special 
orders.  The  plant  suggests  a  method  of  fitting  "rush"  orders 
into  routine,  which  is  adaptable  to  almost  any  business. 

One  tactful  and  energetic  man  and  an  assistant  constitute 
what  might  be  called  the  "production  department"  for  special 
orders.  To  the  head  comes  every  order  and  letter — from  trav- 
eling salesman,  branch  house  or  customer — suggesting  need  of 
dispatch.  Acknowledgment  is  not  made  immediately  by  the  order 
department;  the  sale  is  simply  recorded,  numbered  and  copied 
in  manifold  for  the  shop  orders,  then  turned  over  to  the  hurry 
desk. 

If  the  case  is  urgent,  the  head  or  his  clerk  takes  the  order 
directly  to  the  foreman  who  must  get  out  the  work  (Form 
XXXIII),  and  they  agree  on  a  shipping  date.  As  soon  as  a  satis- 
factory promise  and  schedule  are  secured,  the  hurry  desk  makes 
out  a  "rush  slip"  (Form  XXXIV)  for  its  tickler  file,  checking 
the  date  of  receipt  and  the  date  of  shipment  promised,  the  branch 
house  or  district  in  which  the  order  originated,  the  factory  num- 
ber and  the  department  having  the  work  in  hand. 

The  original  letter  and  order  are  then  turned  over  to  one  of 
the  order  correspondents — the  hurry  desk  is  in  the  same  room — 
with  the  information  secured  and  perhaps  a  suggestion  as  to 
framing  the  acknowledgment.  If  delay  is  unavoidable  because 
of  factory  conditions,  the  head  or  his  assistant  dictates  the 
letter  and  makes  it  clear  to  the  customer  why  his  demands  can- 
not be  met. 

In  the  hurry  department's  "tickler,"  the  rush  slip  (Form 
XXXIV)  is  filed  far  enough  ahead  of  the  shipping  date  to  pro- 
vide for  a  successful  eleventh-hour  effort  to  finish  the  job  on 
time.  For  instance,  if  the  foreman  has  been  given  three  days 


SPECIAL  ORDER  SYSTEMS 


to  get  out  some  simple  device  which  could  be  rushed  in  a  single 
day,  the  hurry  slip  is  filed  for  the  day  of  shipment.  If  the  order 
is  for  a  more  elaborate  appliance  promised  in  eight  or  ten  days 
and  requiring  half  that  time  to  machine  and  assemble,  the  hurry 
slip  is  filed  for  the  date  when  work  must  be  begun  and  on  that 
date,  after  the  shop  has  received  its  nudge,  is  re-filed  for  the 
day  before  shipment. 

If  an  appliance  must  be  passed  from  department  to  depart- 
ment, its  progress  on  the  appointed  days  is  traced  as  if  shipment 
were  involved.  Where  two  or  three  or  ten  factory  numbers  are 
to  be  included  in  one  customer's  shipment,  the  factory  order  for 


Entered       **//& 

Hurry  Slip      ^ 

7^f*ts* 

^  . 

^ 

<^ 

dfc 

Check  Date  of  Re-prom 

iro     1 

2 

3 

11 

12 

13 

14 

15 

150    16 

17 

18 

19 

20 

21      22     tf    J 

4     25 

26 

27 

28 

29 

30 

31 

/                         Branch  Sending  Order 
Atlanta    Chicago     Mtopnis    Minneapolis     New  Orleans    New  York    Portland 

San  Francisco     Seattle    Toronto 

Order  Number 

Circular 

Shgl. 
Hdg. 

Drag 
Gang 

Hand     BJ 

cj.    MIscL 

Wood 

Band 

XCut 

CyL 

Inst 

bug* 

Small 

0*5""  2T  7  O 

6 

•ffc?  " 

RUSH 

rhis  order  Is  Attached  to  Y 

•t?d 

our 

«&** 

a 
•fieSLds' 

No.    wo 

Shipment 

Give  Promise  and  Return  This  Slip  to 

Th8  ttWrderfffor0"      F/J_f 

Hurry  C 

ItstSttQ* 

epartment 

Delayed  (state  Cause)^L  JT^ft^^-^ucJ-^f  %j 

(2— 

FORMS  XXXIII  and  XXXIV:      Holding  a  department  foreman  to  his  promise  has  been  made 

easier  in  one  factory  by  the  two  forms  here  shown.    The  "hurry"  order  card,  which  is  inked  in  red,  is 

given  to  the  department  foreman  by  the  order  clerk  if  the  job  is  to  be  rushed.   Form  XXXIV  (at  the 

right)  is  the  "rush    slip  for  the  tickler  file  indexed  by  shipment  dates 

each  notes  that  they  are  to  be  shipped  with  the  other  numbers 
on  the  date  fixed  and  a  separate  "rush  slip"  is  made  out  for 
each  in  the  hurry  department  tickler  file.  Each  morning,  of 
course,  the  tickler  shows  what  jobs  must  be  investigated  and 
started  towards  definite  conclusion.  If  for  any  reason  an  ex- 
tension of  time  must  be  made — non-delivery  of  raw  materials  or 
of  castings  from  the  foundry  as  an  example — the  tickler  cards 
are  changed,  the  new  date  of  promise  checked,  the  first  date 
noted  in  a  space  reserved  and  the  cause  of  the  delay  made  clear. 
Promptly,  too,  the  customer  is  notified  in  a  letter  of  explanation 


86 PRODUCTION   METHODS 

and  apology  written  by  the  hurry  head.  If  more  than  one  appli- 
ance is  involved,  a  partial  shipment  is  promised,  and  made  on 
the  date  originally  set  for  shipment.  The  branch  house,  too,  is 
informed  of  the  delay. 

On  the  copy  of  the  factory  order  given  the  foreman,  the  form 

is  stamped,  "Hurried ,"  "Promised ,"  and  the  date 

is  filled  in.  On  the  material  process  ticket  which  accompa- 
nies the  job  in  its  progress  through  the  shop  the  foreman  indi- 
cates the  dates  on  which  each  machine  operation  must  be  per- 
formed and  stamps  the  ticket  "special  hurry,"  "express"  or 
"urgent,"  as  the  situation  demands.  The  original  order  is 
kept  in  his  tickler  file  and  handled  much  as  is  the  "rush  slip" 
in  the  hurry  department.  In  the  more  highly  organized  plant, 
all  these  functions  would,  of  course,  gravitate  to  the  production 
department,  to  which  the  plan  outlined  might  easily  be  adapted. 

It  is  the  duty  of  the  shop  tracer  to  see  that  each  job  is  kept 
to  schedule  and  to  call  the  attention  of  the  foreman  to  any 
lagging  order.  The  tracer  system  if  rigidly  carried  out,  would 
make  the  hurry  department  unnecessary.  But  systems  and 
foremen  sometimes  break  down  under  stress  unless  a  check  is 
maintained  on  them.  This  check  the  hurry  department  affords. 
If  a  foreman  refuses  to  better  a  shipping  date  which  strikes 
the  hurry  man  as  unfair  to  the  customer,  the  matter  is  referred 
immediately  to  the  superintendent,  who  takes  up  the  matter  with 
the  foreman  and  makes  the  decision.  If  the  foreman  fails  to 
make  good  his  promises,  the  superintendent  again  is  informed. 
His  intervention,  however,  usually  is  invoked  only  when  over- 
crowding of  a  department  demands  some  change  in  its  shop 
practice. 

One  further  check  on  the  progress  of  urgent  orders  is  afforded 
by  the  shipping  department,  which  receives  a  copy  of  each  factory 
order.  Those  stamped  "Hurried-Promised"  are  filed  by  dates, 
apart  from  the  regular  orders. 

In  the  application  of  any  method  for  pushing  through  special 
work,  the  importance  of  maintaining  the  general  schedule  should 
prevail.  If  charged  with  the  disarrangement  of  the  general 
schedule  which  the  special  order  involves,  the  latter  will  be  found 
so  expensive  that  it  will  be  tolerated  only  in  cases  where  the 


SPECIAL  ORDER  SYSTEMS 87 

factory  is  especially  organized  for  it  and  where  prices  accurately 
match  the  true  costs.  To  maintain  the  steady  stream  of  stand- 
ard production  to  which  every  department  contributes  its  utmost 
is  the  true  aim  of  the  chief  production  clerk  as  he  dispatches 
the  work  and  watches  the  schedule  hour  by  hour. 


.          VII 

KEEPING  QUALITY  UP  TO 
STANDARD 


QUALITY  is  the  final  aim  of  production.  Quality  in  the 
factory,  however,  means  not  necessarily  the  highest  grade, 
but  fit  grade.  In  every  well-governed  plant,  the  quality 
of  the  product  has  been  defined  closely  by  the  aid  of  laboratory 
tests  and  micrometer  gages;  it  is  the  concrete  expression  of 
the  factory's  reason  for  being — a  definition  of  the  value  which 
the  management  has  determined  to  give  at  a  certain  price,  in 
order  to  meet  competition  and  make  a  place  for  itself  in  certain 
veins  of  trade. 

If  the  business  is  to  be  successful,  the  quality  of  the  product 
and  the  character  of  the  service  rendered  in  connection  with  it 
must  in  the  main  compare  favorably  with  what  consumers  can 
obtain  elsewhere  at  the  same  price.  With  every  fluctuation  from 
the  determined  quality,  therefore,  the  position  which  the  busi- 
ness holds  is  in  danger.  Too  high  quality  means  sales  at  a  loss ; 
too  low,  lost  sales. 

Once  quality  depended  entirely  upon  the  skill  and  integrity 
of  the  foreman  and  his  men.  Under  standardized  production 
the  chief  responsibility  has  in  many  cases  been  shifted  from 
the  craftsman  to  the  trained  inspector.  Through  both  plans, 
however,  the  central  principle  persists;  set  up  accurately  de- 
termined standards  for  materials  and  work,  governed  by  what 
the  trade  demands  and  what  the  factory  can  do;  as  often  as 
necessary,  compare  the  goods  in  process  with  these  exact  stand- 
ards, under  conditions  that  assure  trained  and  unbiased  judg- 
ment. 

Eternal  inspection,  in  other  words,  is  the  price  of  quality 


INSPECTING  WORK 89 

production.  It  is  not  enough  to  know  that  the  raw  material 
entering  into  the  product  stands  all  tests,  or  that  the  product 
when  completed  serves  temporarily  with  apparent  fitness.  Be- 
tween these  extremes  of  production,  comparison  of  standard  and 
output  must  be  made  in  a  multitude  of  details,  if  the  good  repu- 
tation of  the  brand  is  to  be  upheld.  This  need  for  inspection  of 
details  is  particularly  important  in  the  manufacture  of  machines 
in  which  the  subdivision  of  labor  makes  each  man  responsible  for 
the  production  of  a  single  wheel  or  lever,  any  one  of  which, 
turned  out  as  they  are  by  thousands,  may  be  defective.  The 
inspector's  eye  must  detect  these  spoiled  pieces  before  they 
slip  further  down  the  line  of  production,  for  the  greater  distance 
a  defective  part  has  traveled  from  its  originating  department, 
the  more  expensive  is  its  replacement. 

HOW  QUALITY  IS  MAINTAINED  AT  THE 
NATIONAL  CASH  REGISTER  PLANT 

THHIS  work  of  keeping  quality  up  to  the  mark  by  careful  and 
systematic  inspection  in  step  with  production  has  been 
worked  out  minutely  at  the  plant  of  the  National  Cash  Register 
Company.  Everywhere  the  principle  of  sound  inspection  is 
evident.  Standards  are  absolutely  fixed,  in  whatever  refine- 
ment is  practical.  And  to  insure  accurate  comparison,  inspectors 
and  superinspectors  are  supplied  who  are  trained,  rendered  in- 
dependent of  production  authority,  to  free  them  from  bias,  and 
organized  like  a  system  of  courts,  and  judges  to  avoid  the  mis- 
carriage of  quality  in  any  case.  Not  only  is  inspection  of  single 
and  assembled  parts  carried  on  with  great  accuracy,  but  the 
work  of  the  inspectors  themselves  is  checked  in  turn.  Between 
every  two  departments  stand  inspectors,  making  it  almost  im- 
possible for  a  defective  part  to  escape  detection  and  enter  the 
next  process.  Imperfect  work  is  quarantined  at  its  point  of 
origin,  which  is  the  first  law  of  inspection. 

After  the  testing  of  the  raw  materials,  general  or  parts  inspec- 
tion, assembling  inspection  and  final  inspection  are  the  three 
steps  in  keeping  quality  up  to  standard  at  the  lowest  final  cost. 
It  follows  that  what  you  pay  for  inspection  service  increases  in 
direct  proportion  as  the  number  of  parts  and  the  complexity 


90 


PRODUCTION  METHODS 


of  the  assembling  process  increase.  Aside  from  cost  considera- 
tions, however,  all  three  steps  are  possible  and  necessary  with 
all  but  the  simplest  articles,  if  quality  is  to  be  raised  to  a  high 
level  and  kept  there. 

This  three-fold,  inter-checking  inspection  service  is  thoroughly 
established  in  the  Dayton  plant.     A  detailed  study  of  it  will 


FORMS  XXXV-XXXVII:  At  the  left,  Form  XXXV  shows  how  material  is  ordered  into  the  fac- 
tory by  the  stock  department.  Form  XXXVI  (center)  accompanies  the  stock  on  its  journey  from 
the  clearance  house  to  the  processing  departments.  These  journeys  are  routed  by  the  moving  ticket, 
at  the  right.  The  duplicate  moving  ticket  is  slipped  into  the  box-pocket  along  with  Form  XXXVI. 
The  purpose  of  all  of  this  procedure  is  to  insure  high-grade  quality  all  along  the  line  of  manufacture 

reveal  methods  that  can  be  adapted  to  other  lines  of  manufacture 
and  on  a  smaller  scale  with  equally  good  results. 

The  general  inspection  department,  as  already  indicated, 
criticises  the  work  on  finished  parts  in  every  processing  depart- 
ment. The  machine  units  are  then  inspected  as  assembled.  And 
finally,  a  corps  of  experts  pass  on  the  mechanical  accuracy  and 
finish  of  machines,  and  in  so  doing  also  check  the  work  of  the 
general  inspectors. 

Handling  the  two  hundred  million  pieces  of  stock  which  yearly 
pass  inspection  at  the  National  Cash  Register  plant  is  the  first 
operation  in  the  inspection  system  which  has  been  outlined. 
Scores  of  men  and  thousands  of  gages  are  used.  Many  of  the 
parts  cannot  vary  more  than  0.0005  of  an  inch  from  the  exact 
size,  and  in  no  case  is  a  variation  of  0.002  inches  allowed.  So 


Both  product  and  operation  in  the  Ford  plant  find  the  shortest  road  to  completion  and  then  stick 
to  it.     Through  the  babbitting  process  (above),  castings  move  steadily  in  "Indian  file."    Each  man 
has  a  definite  station  and  task.     In  the  foundry  (below),  cores  are  loaded  on  the  exposed  half  of  the 
turnstile,  while  cores  on  the  other  half  are  baking 


In  the  factory  of  the  Kahn  Tailoring  Company  baskets  run  by  trolley  from  the  central  control  station 
to  the  work  tables,  where  different  parts  of  a  suit  are  made.  Each  day's  allotment  of  work  has  a 
separate  set  of  compartments  in  the  semi-circular  rack  above.  Colored  signals  at  each  table  indicate 
what  day's  work  is  in  progress.  The  ajm  is  to  get  tomorrow's  flag  up  before  the  whistle  blows  today 


INSPECTING  WORK 93 

accurate  is  this  inspection  of  parts,  that  practically  no  fitting  has 
to  be  done  in  the  assembling  room. 

A  rather  novel  department,  known  as  the  clearance  house,  acts 
as  a  go-between  in  handling  the  work  in  the  manufacturing 
processes.  As  its  name  signifies,  this  department  has  to  do  with 
transfers  of  orders  and  stock.  The  stock,  when  delivered  from 
the  storeroom  as  raw  material,  is  sent  first  to  the  proper  ma- 
chine room,  in  suitable  boxes.  The  manufacturing  process  is 
subdivided  into  departments,  each  in  charge  of  a  foreman.  There 
are  foremen  of  milling,  bench  work,  filing,  gear  cutting,  drilling, 
screw  making,  punch  work  and  other  operations.  The  box  goes 
to  the  first  foreman  having  to  do  with  the  job  in  hand.  When 
the  operation  in  his  department  is  completed,  the  box  of  partly 
finished  pieces  goes,  not  to  the  next  operating  department,  but 
to  the  clearance  house,  from  which  it  is  routed  to  the  inspectors 
and  then  on  to  the  next  process.  So  the  routing  of  stock  is 
handled  by  a  distinct  department  which  can  carefully  watch  the 
progress  of  the  work.  In  many  ways,  the  clearance  house  per- 
forms the  duties  of  a  production  department.  In  detail  the  sys- 
tem works  out  as  follows : 

After  the  raw  stock  has  been  inspected,  the  stock  is  ordered 
into  the  factory  by  the  stock  department  on  receipt  of  pro- 
duction order  blanks  (Form  XXXV).  The  original  of  this  form 
is  sent  to  the  foreman  of  the  department  which  is  concerned  with 
the  first  operation  on  the  stock. 

Inspection  goes  hand  in  hand  with  the  stock  as  it  moves 
through  the  factory.  Delivered  from  the  main  supply  in  boxes, 
each  amount  of  stock  has  a  separate  and  individual  number. 
Going  with  each  box,  in  the  metal  pocket  on  the  side,  is  a  stock 
order  card  (Form  XXXVI)  which  accompanies  the  material  on 
its  way  through  the  plant,  as  a  means  of  identification  by  in- 
spectors. Upon  this  card  is  entered  all  the  data  as  to  the  amount 
of  stock,  time  consumed  on  operation,  price,  pieces  lost  and 
workman's  name. 

The  clearance  house  handles  the  accounting  on  all  these  items 
and  a  record  of  the  progress  of  each  box  by  number  is  kept  on 
a  clearance  sheet  (Form  XXXVIII).  When  stock,  for  instance, 
is  sent  out  to  the  machine  shop,  a  record  is  made  on  both  the  stock 
order  card  and  the  clearance  sheet.  The  former  accompanies  the 


94 


PRODUCTION  METHODS 


box  of  stock  to  the  machine  room.  When  the  operation  is  fin- 
ished, the  stock  together  with  the  order  card,  or  time  ticket,  as 
it  is  called,  is  returned  to  the  clearance  house.  The  clearance 
house  clerks  then  enter  all  data  from  the  time  tickets  on  the 
clearance  sheet. 


FORM  XXXVIII:    On  this  clearance  sheet  is  kept  a  record  of  the  various  operations  through 
which  each  part  passes.    The  data  on  this  sheet  is  entered  by  the  clearance  house  clerks.     From 
these  records  costs  are  computed  accurately  on  work  passed  by  inspectors.    The  sheet  formi  a  com- 
pact summary  of  operations 

As  soon  as  the  time  ticket  has  been  entered  and  stamped  by 
the  clearance  house  clerk,  it  is  sent  with  the  box  to  the  inspectors* 
benches.  The  parts  are  gaged  by  the  inspector  and  the  time 
ticket  receives  his  0.  K.,  lost  or  rejected  pieces  first  being  recorded 
on  it.  The  workman  is  paid  only  for  the  amount  of  stock  marked 
with  the  inspector's  0.  K. 

The  inspector  then  turns  in  the  order  card  to  another  clerk  in 
the  clearance  house,  who  enters  on  the  clearance  sheet  the  num- 
ber of  good  pieces  and  the  inspector's  initials.  From  this  form 
the  work  of  clerks  and  inspectors  can  easily  be  checked. 

After  this  inspection  is  concluded,  the  order  card  is  returned 
to  its  box,  and  a  moving  ticket,  or  clearance  house  sheet,  is 
placed  with  it  (Form  XXXVII) .  This  moving  ticket  is  made  out 


INSPECTING   WORK 


95 


Piece  Lost  1 

CJ                                             Report  One  Item  On! 
EMorof  Form  and  (X)  after 
Indicates  Where  Los 

leport                           MMU|    QI, 

r  on  a  Sheet. 
Mame  of  Department 
i  Was  Noted 

Items  Common  to  All  Departments                          Foundry     (   ) 

Plate  No.        Slzi         Pat  Ho.     Date  Cast     MTdby 

Defect                Where  Lost           size  Flask 

(lnd.byNo.)        H       DBni      Tr 

Cleaning  Department      (X) 

Enameling  Department    (   ) 

Where  Lost                             Ftfy 

Where  Lost            Enameled       Inspection  Change 

Rt     1  B    H  Cl    Ch     Fin     fir     Or    2  B    Tr     Disc't 

Fur  Tr   6  C  En  Date  By  Fur  No,    2ml        Cull 

Packing  Department    (   ) 

Date  En     En  by    Fur  No. 
Where  Lost 

Inspection  Change 

Graded  from                       Graded  to 

Pal     Dec     Fit     Pak      Tr 

fst       2nd      A.O.E.    Cull      2nd              1  En 

Charge  Back  to 

Not  Charged  Back  —  Who  to  Blame 

Name                       No.            Position 

Name                      No.            Position 

Statements  (Foreman  or  Inspector  in  Every  Case  Get  Statement  of  Man) 

Han  NIL 

M»n  MIL 

Signed  .  .  , 

Slpifld 

Foreman 

Signed  Position  

Signed  Location  

Countersigned                                         Referred  to              Entered  Payroll            Enfd  Recap.  Losses 
Chief  Inspector 

FORM  XXXIX:    This  inspection  form  is  notable  for  several  reasons.    The  greater  part  of  the  in- 
formation required  on  each  piece  thrown  out  can  be  recorded  merely  by  a  pencil  check.     By  having 
spaces  for  all  the  departments,  one  design  answers  every  purpose.      For  each  of  the  four  main  de- 
partments, however,  a  different  color  is  employed,  with  an  identifying  symbol 


96 PRODUCTION  METHODS 

in  duplicate.  The  original  is  sent  to  the  foreman  having  to  do 
with  the  next  operation,  and  the  duplicate  is  placed  in  the  metal 
pocket  on  its  box,  along  with  the  order  card.  When  the  fore- 
man can  do  the  job,  he  sends  the  original  back  to  the  clearance 
house.  Acting  on  the  moving  ticket,  properly  signed,  as  an 
order,  the  clearance  house  clerk  immediately  sends  the  stock  out 
to  the  foreman,  while  the  order  card  is  again  properly  entered 
to  correspond  with  the  operations.  The  clearance  house  sheet 
at  the  same  time  receives  its  additional  data.  The  sheet  is  sent 
with  the  stock,  then  signed  by  the  receiving  foreman  and  returned 
to  the  clearance  house. 

Thus  the  clearance  department  is  enabled  to  tell  exactly  where 
any  stock  is,  the  quantity  on  hand,  the  exact  cost,  the  lost  pieces, 
the  workman's  name  and  the  price  paid.  For  each  class  of  ma- 
chine built  at  the  National  Cash  Register  Company's  plant,  the 
order  card  has  a  distinctive  color,  so  that  the  inspectors  can 
tell  at  a  glance  where  the  stock  is  going.  Every  processing  de- 
partment does  its  part  of  the  work  by  this  same  routine.  The 
parts  when  finished  go  to  the  finished  stock  department. 

The  general  inspection  department  works  throughout  the  plant. 
Men  in  this  section  are  distributed  in  the  various  departments. 
In  the  foundry,  for  example,  all  castings  are  submitted  to  a 
staff  of  three  inspectors  who  reject  imperfect  pieces,  charging 
them  against  the  piecework  molder  and  requiring  him  to  make 
others.  Every  foundry  man  has  his  individual  stamp,  so  that 
when  the  parts  are  examined  in  the  inspection  room,  each  re- 
jected piece  can  be  traced  back  to  the  proper  molder,  even 
though  several  may  be  turning  out  the  same  kind  of  casting. 
The  castings  accepted  by  the  foundry  inspectors  are  shipped  to 
the  finished  stock-room. 

When  the  finished  parts  are  ordered  into  the  assembling  de- 
partments, the  second  stage  of  inspection  is  entered.  The  inspec- 
tion routine  for  parts  that  are  assembled  in  groups  is  like  that 
for  single  parts.  The  inspection  and  routing  service  is  main- 
tained in  all  the  assembling  departments,  but  these,  of  course, 
are  not  as  numerous  as  the  processing  departments. 

The  final  inspection  department  is  outside  the  authority  of 
the  works  manager.  This  is  an  essential  if  quality  is  to  be 
gaged  independently  and  with  fresh  insight.  If  it  were  not,  the 


INSPECTING  WORK 97 

heads  of  assembling  departments  in  their  efforts  to  turn  out  a 
maximum  number  of  machines  might  urge  less  searching  inspec- 
tion on  the  superintendent.  But  the  final  court  of  inspection, 
which  accepts  or  rejects  each  machine,  not  only  as  to  finish,  but 
also  mechanical  accuracy,  occupies  a  position  outside  the  shops 
and  familiar  with  trade  considerations. 

These  are  the  detailed  inspection  methods  of  a  big  plant.  In 
many  factories,  inspection  can  be  handled  more  simply.  It  may 
sometimes  be  inexpedient,  for  example,  to  establish  a  clearance 
house.  To  do  so  might  merely  delay  and  complicate  production. 
But  the  big  plant  is  the  microscope  by  which  methods  are  per- 
fected in  detail  and  underlying  principles  developed.  In  the 
field  of  inspection,  these  principles  from  which  no  shop  can 
wisely  deviate  are  (1)  standards;  (2)  unbiased  comparison  of 
work  with  standards;  (3)  such  scheduling  of  inspection 
work  upon  single  parts,  assembled  units  and  the  finished  product 
as  will  throw  every  imperfect  piece  out  of  the  stream  of  produc- 
tion at  the  earliest  possible  moment. 

QUALITY  STANDARDS  AND  THE  PROBLEM 
OF  QUANTITY 

"D  ACK  of  inspection,  of  course,  must  stand  accurate  produc- 
tion. The  inspector  in  any  case  is  merely  a  critic.  The 
standard  which  is  used  by  inspectors  must  first  guide  the  plan- 
ning room  in  laying  out  the  work,  and  the  machinist  in  doing 
it.  The  inspection  system  and  the  production  system  need  to  be 
smoothly  coordinated  with  identical  standards  expressed  in  the 
most  definite  practical  terms.  A  ''standard  of  quality,"  based 
upon  nothing  more  than  the  pride  of  the  manager  who  once 
worked  at  a  bench,  is  merely  a  point  of  origin  for  blunders  and 
disputes.  "Workmanship  and  inspection  must  be  based  on  actual 
dimensions,  weights,  and  tests  of  strength,  durability,  finish, 
chemical  make-up  and  utility. 

If  quality  be  interpreted  as  fitness,  as  it  should  be,  then  a 
piece  of  work  can  be  fit  or  unfit,  well  made  or  poorly  made,  true 
to  standard  or  false  to  standard.  A  dimension  may  be  inaccu- 
rate or  a  finish  unsatisfactory.  In  uncovering  the  cause  for 
poor  quality,  the  manager  sooner  or  later  conies  to  the  ques- 


98 PRODUCTION  METHODS 

tion:  "Is  quantity  production  antagonistic  to  final  quality ?" 
The  determination  of  the  point  at  which  quality,  output  and 
costs  are  all  at  their  best  is  an  important  factor  in  establishing 
production  standards.  It  should  be  made  the  subject  of  careful 
study  and  experiment.  For  quality  standards  are  simply  the 
expression  of  what  the  plant  can  do  best. 

Outside  the  factory,  the  customer  is  the  supreme  inspector. 
If  his  verdict  is  to  continue  favorable,  production  and  inspection 
must  at  least  keep  pace  with  the  efforts  of  the  most  painstaking 
competitors.  It  is  often  said  nowadays,  that  articles  manufac- 
tured under  modern  conditions  wear  poorly  in  comparison  with 
the  products  of  former  times,  made  by  hand  from  labor- wrought 
materials.  A  million-dollar  concern  recently  discovered  that  a 
reputation  for  making  goods  which  wear  out  quickly,  as  a 
means  of  forcing  "  repeat "  business,  may  very  quickly  turn  the 
public  to  competing  lines. 

For  the  judgment  of  the  customer  is  the  one  which  counts. 
If  the  "money  back  if  not  satisfied"  idea  cannot  be  used  as 
capital  by  the  sales  department,  safeguards  to  quality  will  have 
been  futile. 


Part  II 


COST-KEEPING  METHODS 


AUTHORITIES  AND  SOURCES 
FOR  PART  II 


Part  II  is  contributed  chiefly  by  Mr.  Porter  who  has  drawn 
on  his  own  experience  and  that  of  many  executives  in  installing 
cost  systems.  Credit  for  advice  and  suggestions  is  due  Frank 
W.  Birdseye  of  Arthur  Young  &  Company,  accountants. 

Chapter  VIII.  Material  was  supplied  in  part  for  this  chapter 
by  James  Logan,  vice-president,  United  States  Envelope  Com- 
pany. 

Chapter  IX.  Particular  reference  is  made  to  the  plants  of 
Clark  Brothers,  Belmont,  N.  Y.,  Baker- Vawter  Company,  Sey- 
mour Manufacturing  Company,  and  the  Kohler  Company. 

Chapters  X  and  XI.  The  experience  of  the  Kohler  Company, 
among  others,  is  drawn  upon  in  these  chapters. 

Chapter  XII.  This  chapter  includes  matter  by  J.  W.  Wiley, 
assistant  secretary,  the  Meyercord  Company.  Reference  is  made 
to  the  methods  followed  by  the  Home  Furniture  Company  of 
York,  Pa.,  the  Kohler  Company,  and  the  Seymour  Manufactur- 
ing Company. 

Chapter  XIII.  Contributed  by  Mr.  Porter  and  John 
Watson.  This  chapter  describes  in  detail  cost-keeping  methods 
in  the  plants  of  the  Sterling  Piano  Company,  the  Kohler 
Company,  Rathbone,  Sard  &  Company,  two  furniture  com- 
panies, and  others. 


VIII 

FITTING  A  COST  SYSTEM 
TO  THE  PLANT 


COST  systems,  unlike  commodities,  cannot  be  purchased  in 
open  market  ready  to  use.  While  the  principles  of  cost 
finding  are  universal,  and  a  certain  uniformity  is  of  great 
value  in  the  comparison  of  data  from  different  plants,  the 
detailed  application  is  different  in  almost  every  line.  Only  in 
plants  that  are  narrowly  competitive  can  essentially  the  same 
system  be  adopted,  and  even  then  it  may  wisely  differ  at  certain 
points.  What  will  be  a  proper  system  under  any  given  set  of 
conditions  needs  to  be  the  special  object  of  study  by  one  who 
not  only  understands  the  principles,  but  also  is  fairly  familiar 
with  the  peculiarities  of  the  business,  or  has  ample  opportunity 
to  become  acquainted  with  them.  A  cost  system  is  an  intricate 
piece  of  special  mechanism,  and  like  all  such  machinery,  must 
be  designed  carefully  and  built  well,  with  the  requirements  of 
use  always  uppermost,  if  it  is  to  stand  up  under  service. 

Not  every  manufacturing  proposition  in  its  existing  state  can 
be  fitted  with  a  finished  cost  system;  conditions  may  not  yet 
be  sufficiently  standard.  This  fact  has  an  important  bearing 
both  on  the  kind  of  a  system  that  ought  to  be  attempted  and  the 
length  of  time  it  will  take  for  installation.  The  farther  along 
the  line  of  specialization  and  standardization  a  factory  is,  the 
easier  it  will  be  to  fit  it  with  a  system  that  will  give  not  only 
costs  but  control.  If  conditions  are  adverse,  it  will  be  futile  to 
try  for  detailed  operational  costs  at  first.  But  the  basic  plan 
should  be  so  broad  that  the  details  can  be  added  as  conditions  are 
rectified  and  a  closer  analysis  becomes  possible. 

Many  managers  make  the  mistake  of  forcing  the  matter.    They 


IQg COST-KEEPING    METHODS 

know  what  constitutes  a  satisfactory  cost,  and  knowing  this, 
their  conscience  will  not  admit  of  half-way  measures.  But  a 
cost  system  that  runs  counter  to  existing  conditions  creates  a 
strong  reaction.  It  must  be  installed  by  degrees  and  each  ad- 
vance step  made  thoroughly  solid  before  another  is  attempted. 
Otherwise  so  much  opposition,  premeditated  as  well  as  unwit- 
ting, will  be  encountered  from  both  foremen  and  men  as  to 
doom  the  reform.  Much  needless  prejudice  has  been  engendered 
against  cost  systems  because  of  headlong  attempts  to  change  shop 
habits  in  stores  accounting,  methods  of  wage  payment  and  details 
of  charging  and  reporting  costs. 

SYSTEM  VERSUS  RED  TAPE— HOW  FAR  DOES  IT  PAY 
TO  GO  IN  CUTTING  COSTS? 

A  NOTHER  mistake  sometimes  made  is  to  go  into  too  great 
detail  on  items  whose  total  cost  does  not  warrant  the  ex- 
pense involved.  The  value  of  detailed  costs  can  hardly  be 
over-emphasized  and  a  cost  system  that  skims  over  the  surface 
is  scarcely  entitled  to  the  name.  But  common  sense  does  not 
endorse  the  spending  of  two  dollars  to  trace  a  dollar.  Cost  reduc- 
tion as  well  as  cost  finding  is  the  purpose  of  cost  figures.  If  the 
expense  of  getting  the  cost  in  its  details  is  more  than  the  saving 
afterwards  realized  through  the  better  control  that  follows,  the 
work  is  not  warranted,  except,  perhaps,  as  a  one-time  measure 
to  get  a  basis  for  estimates. 

Often,  too,  cost  systems  are  needlessly  expensive  in  operation. 
In  the  beginning  the  cost  is  bound  to  be  high,  but  as  the  system 
settles  down  to  a  definite  routine,  the  expense  of  operation  should 
not  burden  the  business.  If  it  still  does  so,  the  forms  are  prob- 
ably too  complicated,  the  clerical  work  is  not  carefully  organized, 
the  possible  short-cut  methods  of  recording,  checking,  posting, 
calculating  and  totalling  are  neglected,  or,  last  but  not  least, 
the  importance  of  a  proper  man  to  head  the  costing  reform  is  not 
sufficiently  realized.  This  last  point  is  really  the  crux  of  the 
whole  matter.  A  fighter  is  needed,  one  with  the  natural  in- 
stinct for  results  and  who  will  take  as  much  pride  in  operating 
his  department  efficiently  and  economically  as  any  other  depart- 
ment head.  The  cost  man  should  in  fact  be  capable  some  day 


PLANNING  THE  COST  SYSTEM 


103 


Selling  Price 


Superintendent 
and  Foremen 


Liability  Insurance  and  Welfare  Work 
Excess  Direct  Labor  Due  to  Inadequate 


Spoilage  and  Returned  Goods  Due  to 

Factory's  Fault 

Share  of  Office  or  Administrative  Expense 
Laboratories  and  Experimental  Work 
Repairs  When  Not  on  Budget  Basis 
Miscellaneous 


Depreciationl  on  Building 
Taxes  \     Equipment 

Insurance  J      and  Stock 
Repairs,  If  on  a  Budget  Basis 
Share  of  Executives'  Salaries 
Trade  Association  Charges 


Share  of  Office  Administrative  Expense 

Agencies  and  Collections 

Salesmen's  Salaries  and  Traveling  Expenses 

Commissions 

Discounts  and  Allowances 

Shipping  and  Delivery  Charges 

Samples 

Returned  Goods  Not  Due  to  Factory's  Fault 

Credit  Losses 

Advertising  When  Not  on  Budget  Basis 

Depreciation         ~]  on  Space  and  Equipment  Used 
Taxes  and  insurance  J     Exclusively  by  the  Sales  Department 
Snare  of  Executives'  Salaries 
Advertising,  if  Handled  on  a  Budget  Basis 


Notes  and  Mortgages 
Preferred  Stock 
Sinking  Fund 
Surplus 

Working  Capital 
Unabsorbed  Overhead}*- 


FIGURE  VI:    The  selling  price  of  any  product  analyzes  into  factory  cost,  composed  of  material, 

labor  and  expense;  selling  cost,  and  profit.     Both  factory  and  selling  expense  are  subdivided  into 

variable  and  fixed  items.    TJnabsorbed  or  unearned  overhead  appears  as  a  possible  element  of  the 

investment — capital  to  bridge  over  dull  times,  interest  charges  on  which  reduce  gross  profits 


104 COST-KEEPING  METHODS 

of  assuming  the  leadership  of  the  organization,  for  his  position 
rightly  viewed  is  that  of  an  assistant  factory  manager. 

Many  manufacturers  have  considered  the  advisability  of  in- 
stalling proper  cost  accounting  methods;  but  the  expense  in- 
volved has  been  a  detriment.  Viewing  it  as  an  expense  is,  how- 
ever, a  fallacy  in  most  cases.  A  good  cost  system  is  an  economy. 
So  quickly  does  it  produce  results  that  in  almost  no  instance 
have  net  profits  failed  to  respond  substantially  within  a  period 
of  six  months  from  the  date  of  installation.  And  when  it  does 
begin  to  show  results,  no  part  of  the  business  pays  so  great  and 
steady  a  return  on  the  investment.  Cost  analysis  in  some  lines 
of  industry  has  done  as  much  to  reduce  the  cost  of  production 
during  the  past  decade  as  mechanical  inventions  and  improve- 
ments in  the  same  period. 

FIRST  PRINCIPLES  IN  COST  KEEPING— CONDITIONS  ON  WHICH 
SOUND  COST  CONTROL  DEPENDS 

A  T  the  base  of  any  proper  accounting  system  is  a  clear  and 
definite  classification  of  the  items  of  cost.  Material  is  pur- 
chased at  a  certain  price.  Through  labor  done  on  it,  value  is 
added.  This  labor  needs  tools  to  work  with,  a  substantial  roof 
over  its  head  and  a  certain  amount  of  supervision  and  direction. 
It  will  also  consume  various  materials  in  the  course  of  manu- 
facture which  are  not  evident  in  the  final  product.  It  will  fur- 
ther require  the  assistance  of  other  labor,  to  maintain  equipment 
and  premises,  move  work,  coordinate  its  activities  and  make 
proper  records.  These,  too,  cannot  conveniently  be  ascribed  to 
any  producing  operation.  Then  it  will  need  the  cooperation  of 
other  labor  to  market  the  product  and  collect  the  revenues  there- 
for. Finally,  to  bridge  the  interval  between  payments  made 
and  payments  received,  a  certain  amount  of  surplus,  or  working 
capital,  will  be  necessary  under  wise  financial  management. 
Every  one  of  these  items  means  money  expended  which  is  in 
addition  to  the  value  added  to  the  original  material  by  the 
actual  labor  applied  to  it.  In  some  equitable  manner,  therefore, 
the  direct  labor  cost  of  each  article  produced  must  be  increased 
to  take  in  all  other  charges. 
How  to  classify  various  items  of  cost  (Figure  VI),  both  direct 


PLANNING  THE  COST  SYSTEM 


105 


T«al  Own  ef  toed  CatHnfi 
net  WOUM  ef  Ceed  CaatMji 
!  AveriieCestPerU.  

Pl|  tot  (Frtlitt  b«U*d)  Clutjri  tot.  Capsta 

S    Bacee  and  Sprns 

Coat  peri 

SUndird 

1    Cepehlopaln 
1    dvetiLator 
10    Cepela  MatorMs,  ifc.SaMMded  a>  May  (a  Darted 
11 
W   Caaota  Sapc««t  
U  lilnr  for  loadoi  and  Taadaf 

ra? 

Blstriouted 
teClttses 
en  Bails 

I  N 

_/ 

It   M»fn»a,«c        __ 

x-* 

I 

11    liter 

Actoi 
-  TT  

Csd  sad  CMmartW  Oasts 

t 

f 

_             .            - 
M                          Font*!  Castinp 

'       '          ~  1 

I 

I"  SS=  

"—  I* 

H 

20   Brave) 

j 

21    Fitlni 

L 

F] 
el 

CO 

la 
he 
al 
th 
in 
gr 

w! 
es 
to 
dr 
elf 

CO 

Al 
su 
en 
ar 
to 
dis 
ch 
gr< 
m{ 
»l 
chs 
div 
Th 
me 
'       ing 
->       for 
tot 
wh 

/> 

'cort?      f 

30  Cora  «eacj  Supplies  
31    Chaplin 

_.         .         .....,._.          ,-. 

3)   lumber  for  Itomrtiif  Flasks 

sssssx. 

34   Labor  oa  All  of  the  Abate 

» 

»         »»Mt*iiN«idnr  S«"P  

Total 
Expenditures 

1 

40         FrelfM  Oetwrift                                        ' 

I 

41         fewer  tor  Tart  m*  Cipotl  Sonic* 

[GURE  VII:     All  t 
;ments    of    a    found 
st    system  —  materii 
JOP    and   burden  —  a 
re  assembled  graphi 
y.  A  similar  analysis 
e  same  elements  can 
ade  in  any  factory.  T 
aphic  method  visualiz 
e    relation    of     iten 
lich    would    otherwi 
:ape  notice.  At  the  lei 
Lai    expenditures     a 
/ided  into  two  gener 

be 

I 

re 
c- 
of 
ie 

1C 

es 
is 
se 
t, 
re 
al 
If 
t. 
•e 
1- 
is 

IS 

>r 
n 

s 
- 
i 

e 
1. 

i- 

t 
e 
n 

e 

m 

42        Mou«*erEstlai»MCtarnditaFhedll«e 

a 

43         Per  Htna  Pewerltoar 

44 

4»                             AppfJedLabw 

AppM 
to  Product 

17    MotdtrV  Helpers 

• 

48   AaprOBtic^a 

49    Curt  Mafcus 

g 

50    Core  Maknt1  Helpers 

j 

H    Clemen  aad  CNppers 

II                               note: 

f 

14         Semetlam  to  Treated  acSarcliarfo  Labor,   toBe 

i 

X         DtatrtM^o.tos*elPereaP»at».t»1ioii.verltJ» 

f 

» 

£ 

j 

M                                                      i  ' 

Suidurrg.il 
on  Applied 

Labor        ' 

wa 

3t  and  commercial  cos 
'   of    these   items   a 
>divided  into  their  e 
Lents  and  these  iten 
;  then  regrouped  so  € 
give  a  logical  basis  f( 
tributing   the  burde 
irges.    Raw  materia 
>up  under  one   heac 
',  applied  labor  unde 
other.        The   sui 
irges  on  each  of  thes 
isions  are  alsogroupec 
e   sum   of    the   con 
rcial  and  manufactui 
costs  gives  total  coj 
the  year,  equal  to  th 
al  expenditures    froi 
ich  the  start  was  mad 

j 

N  Salaries  01  SapertattadtBl.  Form* 

8 

II   Cbeoitt,  Feuednr  Ctorka 

i 

H  P^..B^«««c.  freer*.  

|        p.S^F.rtJLrS.Me 

1?        CkarfedttaFInd  Kt.  per  Horse  Power  Naur 

i  HaMaaieiia  lad  Banawil  of  Cqidpaiaiit 

II  taerallitcelUMmWark 

71   'attar.  tlaC 

4   Hote;:0cc«sjflii»lly  rtU  PotsJWatfl  Treat 

n         71,72,<i«t;73ClaaaeawAp.aiidMgr 

^IWateittriilo.1  1 

•S?* 

•TSf- 

OlsMiMedl.    ' 

EacH  Saparajop 
Ctna  ens 

^  Wen*  0**"*  at  Cart.fi  

106 COST-KEEPING   METHODS 

and  indirect,  how  to  collect  arid  distribute  them,  and  how  finally 
to  assemble  the  total  cost  will  be  told  in  the  following  chapters. 
As  the  cost  system  must  rest  on  a  solid  foundation  of  physical 
facts,  the  way  to  determine  the  valuation  of  the  fixed  assets — 
buildings  and  equipment — is  first  described.  To  get  the  ap- 
praisal right  is  the  initial  step  of  cost  installation.  Then  fol- 
lows naturally  the  compilation  of  the  fixed  charges,  and  next 
the  tabulation  and  distribution  of  the  combined  fixed  charges 
and  other  overhead  items,  together  commonly  known  by  the 
term  manufacturing  expense,  or  simply  expense. 

This  part  of  the  work  is  usually  laid  out  first,  and  in  the  mean- 
time the  system  of  collecting  the  labor  and  material  charges  is 
gradually  perfected,  so  that  when  the  labor  cost  is  regularly 
reported  the  expense  charges  will  be  ready  to  combine  with  it. 
Often  months  elapse  before  this  is  possible,  owing  to  the  diffi- 
culty of  getting  accurate  reports  on  operations,  as  well  as  a 
clean-cut  division  of  direct  from  indirect  charges.  Only  then 
does  it  become  possible  to  bring  out  total  costs.  The  first  pur- 
pose of  this  work  springs,  of  course,  from  the  necessity  of  costs  in 
estimating  and  pricing.  At  each  step  in  building  the  system,  how- 
ever, the  second  principal  purpose  of  cost  keeping ;  namely,  bet- 
ter control  of  the  plant  activities,  is  kept  constantly  in  mind 
and  the  data  arranged  in  such  form  as  to  convey  to  the  busy 
executive  an  accurate  picture  of  shop  conditions. 

Finally  comes  the  proving  of  the  cost  totals.  It  is  one  matter 
to  compile  pretty  summaries  of  estimated  costs,  quite  another  to 
be  sure  that  the  figures  can  be  depended  upon  as  a  basis  for 
selling  prices.  So  the  work  of  fitting  a  cost  system  to  a  business 
is  not  done  until  the  factory  accounting  is  interwoven  with  the 
general  books  and  thus  regularly  proved.  Only  then  can  the 
management  feel  certain  that  prices  cover  costs  and  include  a 
profit. 


IX 

LAYING  THE  BASIS  FOR 
ACCURATE  COSTS 


FIRE  recently  destroyed  an  Eastern  factory  whose  value 
was  protected  only  partially  by  insurance.  In  the  vault, 
fortunately,  the  records  of  the  goods  on  hand — raw  ma- 
terials, supplies,  finished  stock  and  goods  in  process — survived 
intact.  So  the  management,  in  making  a  settlement  with  the 
insurance  companies,  had  no  difficulty  in  arriving  at  a  fair  ad- 
justment. But  no  record  of  the  cost  of  plant  and  its  equipment 
existed,  except  the  very  general  record  on  the  financial  books. 
This  was  far  from  complete.  There  was  almost  no  accounting 
for  betterments  and  additions,  and  the  company  found  itself 
more  or  less  at  the  mercy  of  the  adjusters.  It  was  not  in  a  posi- 
tion to  question  their  arbitraments  intelligently  and  with  force. 
The  awards,  the  factory  heads  felt,  were  not  as  liberal  as  they 
should  have  been;  but  they  were  powerless  to  combat  the  deci- 
sions. Naturally,  the  officers  wished  that  they  had  been  as  sys- 
tematic in  keeping  track  of  the  valuation  of  their  fixed  property 
as  of  the  materials  of  manufacture.  An  up-to-date  running 
appraisal  no  doubt  would  have  meant  thousands  of  dollars  to 
them  in  a  better  settlement. 

Other  concerns  which  have  neglected  this  first  principle  of 
cost  keeping  have  found  themselves  in  similar  predicaments. 
Not  always  is  it  a  fire  that  discloses  this  need  with  the  force 
of  an  emergency.  Appraisals  also  are  necessary  as  a  basis  for 
equitable  taxation;  to  establish  true  earning  capacity;  to  de- 
termine a  proper  capitalization;  to  fix  the  bonding  limit;  as  a 
basis  for  reorganization,  sale  or  transfer  of  the  property;  and 
as  preparatory  to  remodeling  or  enlarging. 


108 COST-KEEPING   METHODS    

An  accurate  cost  system  is  impossible  without  a  correct  and 
up-to-date  physical  valuation  upon  which  to  calculate  the 
fixed  charges.  And  when  the  other  uses  of  such  a  valuation 
are  considered,  it  may  be  said  that  there  are  many  reasons  for, 
and  none  against,  the  operation  of  a  running  appraisal.  It  is  a 
basic  practice  of  sound  industrial  management. 

In  fact,  the  keeping  of  a  perpetual  appraisal  is  in  strict  accord 
with  the  principle  of  carrying  continuous  card  records  of  stock. 
And  the  proper  starting  point  is  at  the  beginning  of  the  enter- 
prise— otherwise  many  items  that  legitimately  enter  into  the 
cost  of  construction  and  equipping,  and  should  appear  in  every 
subsequent  cost  calculation,  will  be  overlooked.  Then,  if  from 
month  to  month  and  from  year  to  year  the  value  of  improve- 
ments is  added,  and  the  records  are  corrected  for  appreciations, 
depreciations  and  changing  price  levels,  the  management  always 
is  prepared  for  whatever  contingency  may  arise,  not  to  mention 
the  solid  satisfaction  meanwhile  of  having  a  rock-bottom  basis 
for  the  cost  system. 

WHERE  TO  BEGIN  IN  GETTING  AT  THE  AMOUNT  OF  CAPITAL 
INVESTED  IN  THE  PLANT 

TN  making  an  appraisal  the  first  step  is  to  have  an  accurate 
plat  of  the  property  made,  if  none  exists.  The  second  is  to 
have  drawings  prepared  of  the  various  structures,  true  to  line, 
dimension  and  detail,  and  showing  by  some  scheme  of  repre- 
sentation the  location  of  all  equipment.  If  such  drawings  already 
exist,  this  work  is  saved  and  the  appraisers  need  only  to  check 
the  accuracy  of  the  existing  plans. 

To  indicate  where  equipment  is  located  will  be  much  easier  if 
a  system  of  designation  already  is  employed.  If  there  is  none, 
the  factory  manager  will  do  well  to  detail  one  of  his  staff  to 
join  with  the  appraisers  in  working  out  a  suitable  scheme  which 
will  serve  both  their  present  purposes  and  the  permanent  uses 
of  the  factory. 

As  with  stores,  there  are  two  systems  in  common  use  for  desig- 
nating equipment:  one  the  mnemonic,  or  " aid-to-memory ' '  sys- 
tem, wherein  each  piece  of  equipment  is  represented  by  a  letter 
or  combination  of  letters  descriptive  of  the  type  and  location; 


Orderly  methods  safeguard  quality.  Above  ivory  keys  r,re  being  inspected  for  whiteness  under 
the  tell-tale  rays  of  the  mercury  vapor  lamp.  Note  the  careful  arrangement  of  product  in  the 
inspection  department  of  the  Cincinnati  Milling  Machine  Company  (middle),  In  the  assembly 
department  (below),  of  the  same  plant  gasoline  for  cleaning  product  is  kept  in  cans  near  the  benches 


Standard  quality  requires  standardized  inspection  methods.     "Inspect  product  all  along  the  line," 
is  the  rule  of  the  National  Cash  Register  Company.     This  is  based  on  the  fact  that  the  farther  de- 
fective work  travels,  the  more  expensive  it  becomes.     Small  parts  inspection  is  shown  in  the  upper 
picture,  unit  assembly  inspection  in  the  middle  and  final  inspection  below 


DETERMINING  THE  INVESTMENT 111 

the  other  the  numerical  system,  where  each  piece  is  numbered 
consecutively.  Both  serve  equally  well  the  purposes  of  an  ap- 
praisal. The  mnemonic,  however,  has  some  advantages  from  the 
manufacturer's  standpoint.  Chief  among  these  is  the  ease  with 
which  workmen  memorize  the  characters. 

If  the  numerical  system  is  adopted,  flexibility  is  imparted  by 
numbering  the  equipment  in  series  by  departments,  prefixing 
the  letter  or  numeral  designating  the  department  to  the  ma- 
chinery number.  For  instance,  D-20  would  indicate  Machine 
No.  20  in  Department  D.  As  machines  are  added,  the  numbers 
in  a  department  are  kept  together.  This  method  of  number- 
ing also  makes  it  easy  to  locate  any  piece  of  equipment  without 
reference  to  a  map  or  list,  and,  in  this  respect,  ranks  next  to  the 
mnemonic  system  as  an  aid  to  memory.  Under  the  mnemonic, 
the  same  machine  might  be  designated  DMDP-1 — No.  1  Mul- 
tiple-Drill Press  in  Dept.  D. 

Appraisers,  on  the  other  hand,  if  left  to  themselves,  are  wont 
to  number  equipment  up  and  down  the  factory  without  regard 
to  use  or  location  in  departments.  This  may  serve  their  purposes 
as  well  as  any  other  system,  but  it  is  of  no  permanent  use  to  the 
factory. 

In  connection  with  the  cost  system,  the  system  of  designating 
equipment  is  highly  important.  When  it  comes  to  figuring  the 
overhead  charges  by  departments,  much  difficulty  will  be  ex- 
perienced in  picking  out  the  different  appraisal  values  if  they 
are  not  already  grouped  logically.  The  appraisals  records  should 
be  so  arranged  that  a  clerk  with  an  adding  machine  can  in  a  few 
minutes  obtain  the  total  equipment  valuation  in  any  department. 

Once  a  system  of  designation  has  been  worked  out,  the  various 
pieces  of  equipment  need  to  be  marked  in  lasting  fashion.  One 
way  is  to  mark  the  symbol  on  some  conspicuous  part  in  large 
characters  with  white  or  red  paint.  White  is  more  conspicuous 
than  red  but  less  durable,  requiring  renewal  more  frequently. 
Neither  is  as  satisfactory  as  a  brass  plate,  in  which  the  symbol 
has  been  cast  or  stamped,  attached  to  the  machine  by  means  of 
screws.  The  brass  plate  method,  of  course,  is  more  expensive, 
but  the  first  cost  is  the  only  cost.  It  is  unquestionably  the  ideal 
way  of  marking  machines  and  motors.  It  is  less  well  adapted  to 
other  equipment  such  as  waste  cans,  pails  and  tote  boxes.  For 


118 COST-KEEPING  METHODS 

office  furniture,  such  as  desks,  chairs  and  filing  cabinets,  small 
brass  checks  have  been  found  suitable.  At  the  Baker- Vawter 
plant  still  a  different  scheme  is  used.  Here  four-sided  signs  have 
been  hung  from  overhead,  and  the  machine  designation  is  painted 
in  white  on  a  black  background.  The  sign  is  very  conspicuous 
and  equally  so  from  all  angles. 

TAKING  THE  ACTUAL  INVENTORY  WITH  THE  LEAST 
LABOR  AND  EXPENSE 

\\7  HEN  the  symbolizing  of  equipment  is  completed,  the  actual 
inventorying  may  begin.  The  usual  procedure  is  to  list 
each  item  in  turn  without  attempting  more  than  roughly  to 
classify.  One  of  the  regular  force  can  do  this  work  as  well  as 
an  outsider.  As  he  takes  each  article  the  checker  should  mark 
it  plainly  with  a  piece  of  crayon.  A  second  man,  preferably 
one  of  the  appraiser's  staff,  then  makes  an  independent  listing. 
He  cancels  the  chalk  line  of  the  first  man.  If  he  finds  a  piece 
unmarked  he  makes  a  note  of  the  fact.  A  third  man — this  time 
properly  one  of  the  appraisers — then  takes  these  lists  and  com- 
pares them  item  for  item.  If  they  agree  absolutely  he  approves 
them.  If  there  are  any  discrepancies,  or  any  items  on  one  which 
are  not  on  the  other,  he  makes  a  personal  investigation.  His 
work,  in  short,  is  to  reconcile  any  and  all  differences.  This 
method  insures  the  practical  elimination  of  error. 

In  addition  to  jotting  down  the  symbol,  the  checkers  describe 
each  article  briefly,  note  the  date  and  maker  of  machines  (if  vis- 
ible) and  remark  on  the  general  condition — how  well  the  ma- 
chine or  other  piece  of  equipment  has  been  maintained  and  what 
per  cent  of  the  original  service  value  remains,  whether  it  is  still 
an  efficient  type  or  so  obsolete  as  to  justify  early  replacement. 

The  work  is  facilitated  greatly  if  a  regular  form  is  provided, 
with  proper  columns  for  the  various  items  mentioned  and,  in 
addition,  columns  for  unit  prices  and  totals.  Such  a  sheet  is 
shown  in  Form  XL.  It  is  eight  and  a  half  by  eleven  in  size 
and  should  have  a  sufficient  margin  at  the  left  to  allow  fitting 
into  a  standard  binder. 

When  the  inventorying  is  completed  and  verified,  the  next 
step  is  to  price  the  various  articles.  This  is  a  task  that  requires 


DETERMINING  THE  INVESTMENT 


113 


the  close  attention  of  an  expert.  Before  finally  fixing  prices, 
however,  it  is  customary  for  the  appraisers  to  consult  with  the 
factory  manager  or  his  engineer,  as  doubt  often  exists  about 
the  accuracy  of  figures,  which  only  one  intimately  acquainted 
with  the  business  can  remove. 


Taken  oy— 
Checked  by. 


LISTING  SHEET 

Date 

.Priced  by Plant. 


.'Sheet  No. 


.Checked  by. 


Dept. 


..Group. 


Quantity 


Symbol  or  Description 


Made 


Date 


Remarks 


Value 


Unit 


Total 


MACHINE  RECORD 


Machine.  No.        Location       Department 


Description  and  Usage 


iNo.  Parts     Drawing  No. 


Maker 


Maker's  No. 


Purchased  of         Date  Purchased      .Cost 


Year 


1911 


1912    1913    1914    1915    1916    1917 


1918 


Inv.  Value 


,  Depreciation 


Date 


Repairs 


Cost         Date 


Repairs 


Cost 


FORMS  XL  and  XLI:  The  larger  form,  an  8^*11  sheet,  allows  space  for  the  checker  to  note  a 
description  of  machines  and  to  describe  their  general  conditions.  Columns  are  supplied  for  the  re- 
spective values  which  are  to  be  added  later.  When  running  appraisals  are  operated,  a  record 
showing  at  all  times  (the  remaining  service  value  in  each  machine  is  kept  on  the  smaller  form. 
This  is  similar  to  a  perpetual  inventory  of  stock  where  a  separate  card  is  allotted  for  each  article 

Appraisal  of  buildings  and  fixtures  is  an  independent  matter 
(Form  XLII).  If  cost  records  are  available,  both  of  the  orig- 
inal construction  and  of  improvements,  this  part  of  the  work 


114 COST-KEEPING   METHODS 

is  much  simplified.  In  the  absence  of  actual  figures,  the  only 
alternative  is  to  prepare  an  estimate  from  the  building  plans. 
These,  too,  may  be  lacking  or  in  poor  shape,  in  which  case 
new  ones  must  first  be  drafted  from  actual  measurements.  An 
appraiser,  in  this  event,  with  the  assistance  preferably  of  one  or 
two  young  engineers  or  draftsmen,  traverses  the  property  with 
a  field-book  in  hand,  sketching  therein  the  outline  and  principal 
details  of  the  various  structures,  and  noting  dimensions.  From 
these  the  plans  quickly  can  be  reproduced.  It  is  then  easy,  by 
the  ordinary  process  of  taking  off  quantities  for  estimating — 
such  as  any  contractor  does  in  arriving  at  his  tenders — to  pre- 
pare the  inventory  of  permanent  structure.  The  appraiser,  in 
making  his  rounds,  takes  note  of  the  condition  of  the  buildings, 
in  detail  and  as  a  whole,  and  this  information  later  is  used  in 
pricing  quantities.  Deferred  maintenance  also  is  recorded,  to 
be  taken  into  account  in  fixing  present  value. 

It  is  not  always  necessary,  nor  invariably  the  practice,  to  go 
into  complete  detail  in  arriving  at  the  value  of  buildings.  Often 
it  is  possible  to  make  a  fairly  accurate  determination  either  by 
the  square-foot-of-floor  surface  or  the  cubic-foot-of-contents 
method,  using  as  a  basis  unit  prices  for  similar  structures,  modi- 
fied by  a  knowledge  of  local  conditions,  which  may  vary  the 
average  figure  one  way  or  the  other,  depending  on  whether  in 
the  particular  locality  structural  materials  and  labor  are  higher 
or  lower  than  the  average. 

Estimates  by  either  of  these  methods  usually  include  light- 
ing, heating,  plumbing  and  elevators — in  short,  the  building  and 
its  fixtures  complete. 

If  the  appraisal  is  to  serve  not  only  for  cost  keeping,  but  also 
in  determining  the  true  capitalization  or  bonding  limit,  or  as 
a  basis  for  sale  or  transfer,  then  it  must  include  also  equipment 
and  finished  stock  on  hand  and  work  in  process  (Figure  XLIII). 
Building  appraisals,  if  done  in  detail,  may  take  the  form  of  the 
classification  shown  in  Form  XLII. 

To  complete  the  valuation,  a  suitable  amount  to  cover  physical 
development  charges  must  be  added.  These  include  all  expense 
incurred  prior  to  undertaking  the  actual  work  of  construction, 
such  as  organization  expense,  the  expense  of  financing  the  en- 
terprise, city  inspection,  carrying  charges,  legal  expenses,  engi- 


DETERMINING  THE  INVESTMENT 


115 


neering  and  contingencies,  all  of  which  are  a  legitimate  part 
of  the  total  valuation  and  are  in  addition  to  the  estimated  cost- 
to-reproduce-new.  To  cover  these  items  a  figure  of  twelve  to 
fifteen  per  cent  is  commonly  used.  Such  charges  properly,  it 


COST  TO 
ITEMS                                        REPRODUCE  NEW   PRESENT  VALUE 

1.  Excavation 

2.  Material  In  Foundation 

ITEMS 

COST  TO 
REPRODUCE  NEW 

PRESENT  VALUE 

3.  Material  In  Walls 

4.  Steal  Frama  (If  any) 

t.  Power  Plant  (Including  dams  and  reservoirs,  canals  and 
penstocks,  waterwheels  and  governors,  boilers,  anginas. 
generators,  air  compressors,  pumps,  and  so  on) 

5.  Material  In  noon  (If  Mutt-story) 

6.  Basamant 

2.  Transmissions 

7.  Root 

1  Processing  Equipment 

1  Steal  In  Roof  (if  Supported  by  Steel  Underbody) 

«.  Windows  and  Boon 

5.  Small  Tools 

10.  Interior  Finish 

6.  Miscellaneous  Equipment 

11.  Partitions  Not  Classed  as  Watts 

7.  Buildings  and  Structures 

12.  Coping  and  T.  C.  Trimmings 

8.  Finished  Stock  on  Hand 

13.  Heating 

9.  Work  In  Process 

14.  Plumbing 

10.  Miscellaneous 

15.  lighting 

11.  Sum  of  Items  1-10 

IS.  Pilrttel 

11  Percentage  to  cover  engineering,  supervision.  Interest 
during  construction,  liability  Insurance,  contingencies, 
and  so  on 

17.  Etovaton 

11  Miscellaneous 

11  Total  Items  11  and  12 

19  Total  of  Kerns  1-18 

14.  Office  Furniture  and  Fixtures 

20.  Add  percentage  to  eovar  supervision  or  general 
contractor's  prom 

15.  Motor  Cars  and  Trucks.  Wagons,  Horses  and  Harness 

16.  Raw  Material  and  Supplies  on  Hand 

21  Total  Items  19  and  20 

17.  Real  Estate.  Including  fence,  sewers,  and  so  on 

18.  Railroad  Siding 

19.  Sum  of  Items  14  -18 

20.  Totai  Items  13  and  19 

FORMS  XLII  and  XLIII:     The  complete  appraisal,  including  shipment  and  finished  stock  on  hand 
and  work  in  process,  shapes  itself  as  shown  in  the  form  at  the  left.  If  building  appraisals  are  han- 
dled in  detail,  they  may  take  the  form  shown  at  the  right 

should  be  said,  ought  to  have  been  wiped  out  by  absorption  into 
the  costs  over  a  period  of  years ;  but  if  they  have  not  been  liqui- 
dated, it  seems  fair  to  allow  something  for  them  in  the  valuation. 
Another  debatable  question  is  the  proper  pricing  of  real  estate. 
Often  the  land  on  which  a  plant  is  located  has  so  appreciated  in 
value,  through  development  of  the  vicinity,  that  it  is  worth 
more  than  the  original  price  plus  the  plant  valuation.  Indeed, 
sometimes  the  appreciation  is  such  that  it  pays  to  sell  the  prop- 


116 COST-KEEPING   METHODS 

erty,  dismantle  the  plant  and  raze  the  buildings,  and  with  the 
money  realized  build  and  equip  a  modern  plant  in  another 
locality  where  land  is  still  cheap.  To  include,  then,  the  value 
of  appreciated  real  estate  in  the  valuation  for  cost  purposes  mani- 
festly would  be  erroneous — unwise,  in  fact,  as  it  would  require 
such  high  prices  for  the  output  as  seriously  to  handicap  the 
business  in  competitive  markets.  The  majority  of  court  rulings 
and  the  concensus  of  opinion  among  experts  are  averse  to  in- 
cluding real  estate  appreciation.  Instead,  the  tendency  is  to 
treat  it  as  an  earning  on  capital  to  be  accumulated  from  year 
to  year  in  the  surplus  and  finally,  upon  sale  of  the  property,  to 
be  paid  as  a  deferred  dividend.  On  the  other  hand,  in  such  in- 
dustries as  coal  mining  and  brick  making,  real  estate  is  part  of 
the  assets  which  are  being  used  up.  In  this  case,  a  reserve  must 
be  set  up  for  real  estate  depreciation. 

Appreciation  in  value  of  materials,  however,  is  held  differently. 
Sometimes  the  latest  market  prices  are  taken ;  again  the  average 
price  for  the  preceding  three,  four  or  five  years.  As  to  the  exact 
prices  used,  this  must  be  left  largely  to  the  judgment  of  the 
appraiser.  If  the  intangibles  are  to  be  taken  into  considera- 
tion, the  unit  prices  are  modified  accordingly,  otherwise  a  fixed 
sum  is  added  to  the  total.  The  unit  prices  used  are  on  the  basis 
of  the  sub-contracts  and  do  not  include  the  expense  of  supervision 
or  general  contractor's  profit,  for  which  an  item  of,  say,  ten  per 
cent  ordinarily  is  added  to  the  total.  The  purely  equipment 
items,  however,  are  deducted  when  these  have  been  installed 
under  the  manufacturer's  own  supervision,  as  the  cost  thereof 
then  becomes  a  part  of  the  machine  valuation. 

In  arriving  at  the  " present-value"  or  " worth-of -plant "  at 
date  of  appraisal,  depreciation  and  deferred  maintenance  (be- 
lated repairs)  enter  into  the  problem.  A  plant  depreciates  in 
value  from  the  day  it  is  occupied,  and  this  depreciation  increases 
with  the  years  until  the  original  value  is  largely  wriped  out. 
The  minimum  below  which  depreciation  cannot  sink  is  the  scrap 
value.  This  is  the  figure  which  the  materials  and  equipment 
would  bring  as  junk,  less  the  cost  of  removal.  It  is  sometimes 
fixed  at  a  fair  market  valuation  or  taken  as  some  per  cent,  say, 
ten  or  fifteen,  of  the  cost-to-reproduce-new.  So  long  as  use  re- 
mains, however,  there  will  be  a  minimum  value  higher  than  the 


DETERMINING  THE  INVESTMENT 117 

scrap  value,  below  which  the  depreciation  cannot  go.  This  is 
called  the  salvage  value  and  usually  is  twenty-five  per  cent  of 
the  original  cost.  The  salvage  or  scrap  value  taken  from  the 
reproduction  cost  gives  the  working  or  original  service  value, 
upon  which  all  depreciation  must  be  based. 

WHAT  TO  INCLUDE  IN  DEPRECIATION  AND 
HOW  TO  FIGURE  IT 

p\EPEECIATION  includes  all  deterioration  in  value  which 
cannot  be  made  good  by  repairs — obsolescence,  supersession, 
inadequacy,  wear  and  tear.  The  original  service  value  minus 
the  depreciation  gives  what  is  termed  the  service  value,  and  the 
service  value  plus  the  salvage  or  scrap  value  equals  the  present 
value.  If  there  is  any  deferred  maintenance,  it  forms,  of  course, 
a  deduction  from  the  present  value ;  for  it  represents  money  that 
must  be  spent, to  make  good  the  service  value. 

Depreciation  is  figured  in  two  ways.  Either  a  certain  per  cent 
of  the  original  service  value  is  deducted  each  year  from  the  valu- 
ation, or  a  certain  per  cent  of  the  depreciated  value  from  year 
to  year  is  taken.  The  first  is  called  the  ' '  straight-line  method ; ' ' 
the  second,  the  "method  of  diminishing  values. "  In  the  one, 
the  entire  valuation  is  wiped  out  in  the  course  of  time  by  suc- 
cessive equal  decrements ;  in  the  other,  the  scrap  or  salvage  value 
is  approached  as  a  limit  by  successively  diminishing  decrements 
but  is  never  quite  reached.  Theoretically,  the  second  is  the  more 
correct  method ;  but  the  straight-line  plan  serves  and  is  generally 
followed  by  factory  accountants. 

Depreciation  is  simply  a  device  for  absorbing  into  the  costs 
the  original  investment  over  as  long  a  term  of  years  as  prac- 
ticable, so  that  when  the  original  value  is  wiped  off  the  books,  the 
capital  is  restored  intact,  to  be  used  in  replacing  the  discarded 
items  or  applied  to  other  betterment  work.  Usually  the  amounts 
thus  set  aside  are  charged  into  a  depreciation-reserve  account 
and  the  accumulation  either  borrowed  from  for  the  purposes 
of  the  business,  deposited  in  savings  banks,  or  invested  in  out- 
side securities.  There  is  little  justification  for  any  but  the  first 
practice,  if  the  business  otherwise  would  have  to  borrow  from 
outside  sources  for  working  capital,  since  money  invested  in  your 
own  business  usually  pays  a  higher  return  than  elsewhere. 


118 COST-KEEPING   METHODS 

No  essential  difference  exists  between  this  plan  and  the  so- 
called  "sinking-fund"  method.  In  the  latter,  a  certain  pre- 
determined amount  is  set  aside  from  the  surplus,  or  charged  into 
the  costs  each  year,  which  at  compound  interest  will  refund  the 
original  investment  at  the  end  of  a  certain  term  of  years. 

The  wiping  out  of  a  liability,  either  by  a  reserve  account  or 
a  sinking-fund,  technically  is  known  as  "amortization."  Salv- 
age on  discarded  equipment  forms  a  credit  to  the  depreciation- 
reserve  account.  New  equipment,  or  equipment  not  yet  wiped 
out  by  depreciation,  which  is  scrapped,  is  carried  on  the  books 
until  wiped  out,  minus  the  scrap  or  salvage  value.  The  capital 
invested  is  then  diminished  accordingly.  Depreciation  is  not 
charged  on  small  tools,  jigs,  fixtures  and  packing,  as  such  supplies 
are  charged  into  current  expense  or  to  order  costs. 

Renewals,  if  to  replace  an  article  no  longer  capable  of  being 
made  good  by  repairs,  are  chargeable  against  the  depreciation 
reserve.  If  an  improved  article  costing  more  is  installed,  how- 
ever, the  excess  cost  properly  is  chargeable  to  a  Betterment,  or 
Capital  account — it  is  an  added  investment.  All  new  equipment 
and  buildings  are  also  chargeable  to  betterment  accounts. 

No  set  rules  exist  for  figuring  depreciations.  Many  variables 
enter  into  the  problem.  Practice,  however,  has  established  cer- 
tain percentages  which  serve  as  a  guide  to  be  used  with  judg- 
ment in  particular  cases.  These  percentages  are,  for  buildings, 
from  two  to  five  per  cent;  for  equipment,  five  to  ten  per  cent 
and  even,  in  special  cases,  as  heavy  as  twenty  per  cent.  Five 
per  cent  is  usually  taken  for  machine  tools;  ten  per  cent  for 
power  equipment.  Two  per  cent  is  the  figure  commonly  em- 
ployed for  concrete  buildings;  three  to  five  per  cent  for  struc- 
tures of  less  durable  materials.  The  per  cent  of  depreciation  is 
found  by  dividing  one  hundred  by  the  life  in  years.  Thus  a 
depreciation  of  five  per  cent  would  mean  an  estimated  usefulness 
of  twenty  years. 

Such  an  appraisal  indicates  closely  the  working  investment 
which  the  factory .  represents,  and  so  constitutes  the  basis  of 
production  costs.  Maintained  as  a  running  appraisal,  with 
sound  calculation  of  depreciation  and  additions,  it  supplies 
essential  figures  to  the  cost  accounting  year  after  year. 


X 

COMPILING 
FIXED  CHARGES 


BETTER  factory  construction  is  the  rule  every  season  in 
American  industry,  and  even  earlier  types  cost  more  to 
build  now  than  a  few  years  ago.  More  elaborate  heating, 
ventilating  and  sanitary  equipment  is  required.  Needs  for  more 
automatic  and  hence  higher  priced  machinery,  and  for  totally 
new  machines  to  replace  hand  operations,  have  made  necessary 
an  increasingly  heavy  investment  in  mechanical  equipment. 
Land  values  have  appreciated,  and  taxes  have  risen.  Those 
operating  expenses  which  are  due  to  the  capital  investment  have, 
therefore,  gathered  new  significance  with  the  years.  The  ad- 
vent of  scientific  accounting  methods,  moreover,  has  awakened 
many  to  the  fact  that  the  capital  charges  which  they  perhaps 
were  deeming  unimportant  and  were  either  neglecting  to  figure 
at  all  or  were  covering  by  a  "judgment"  percentage  totally 
inadequate,  are  in  many  industries  one  of  the  largest  single  ele- 
ments of  cost.  In  such  plants,  investment  charges  are  now  ab- 
normally important,  for  they  must  make  up  lost  time. 

A  simple  illustration  is  furnished  by  the  teaming  business. 
Not  many  years  ago  horse  vehicles  for  hauling  purposes  could 
be  had  in  any  number  for  three  or  four  dollars  a  day  of  ten 
hours,  including  wages  of  the  driver.  Today  the  charge  is  from 
five  to  six  dollars.  "Why?  Because,  chiefly,  owners  of  teaming 
equipment  are  awakening  to  the  significance  of  overhead.  For- 
merly only  the  actual  cost  of  upkeep,  plus  the  driver's  hire,  was 
considered  in  fixing  the  price.  The  fact  was  largely  ignored 
that  money  tied  up  in  wagons,  harnesses,  horses  and  all  the  other 
fast-depreciating  paraphernalia  necessary  in  this  business,  in- 


120 COST-KEEPING   METHODS 

eluding  stable  room,  was  capable  of  earning  a  fixed  return  with- 
out risking  the  impairment  of  the  principal  or  assuming  the 
burden  of  management.  A  common  justification  for  this  was: 
"Oh,  we  are  obliged  to  have  these  things  anyway;  besides,  no- 
body else  charges  interest  and  upkeep. "  And  these  excuses  have 
their  counterpart  in  other  businesses. 

Consider  these  figures.  A  substantial  wagon  and  harness  will 
cost  close  to  six  hundred  dollars,  a  good  pair  of  draught  horses 
another  six  hundred  dollars.  Accessories  and  stable  facilities 
will  add  easily  five  hundred  more,  bringing  the  total  investment 
up  to  seventeen  hundred  dollars.  This  at  six  per  cent  makes  an 
interest  charge  of  one  hundred  and  two  dollars  annually.  Allow- 
ing for  bad  weather  and  slack  seasons,  not  more  than  two  hun- 
dred working  days  in  a  year  can  be  counted  on.  The  daily  in- 
terest charge  hence  will  amount  to  fifty-one  cents.  To  this  must 
be  added  depreciation  on  live  stock,  at  least  fifteen  per  cent ;  on 
teaming  equipment,  twenty  per  cent ;  on  structures,  ten  per  cent ; 
or,  say,  an  average  of  fifteen  per  cent  on  the  aggregate  invest- 
ment, making  a  total  daily  depreciation  charge  of  $1.28.  Repairs 
will  average  at  least  fifty  cents  more  daily;  care  of  horses  sev- 
enty-five cents,  insurance  twenty-five  cents,  attendance  two  dol- 
lars. Thus  the  grand  total  daily  cost  will  be  $5.29.  So  the  man 
who  hires  out  a  pair  of  horses  and  a  wagon  for  less  than  five 
dollars  a  day  receives  practically  nothing  on  his  investment,  let 
alone  a  reward  for  his  enterprise,  and  at  six  dollars  a  day  the 
return  is  only  about  fifteen  per  cent. 

In  this  instance  the  fixed  charges  aggregate  $2.04,  or  over 
thirty-eight  per  cent  of  the  total  cost.  While  the  proportion  of 
such  charges  in  the  average  manufacturing  establishment  is  sel- 
dom so  high,  it  is  never  so  small  as  to  warrant  either  makeshift 
methods  of  distributing  it,  or  indifference  as  to  the  total.  Large 
or  small  in  relation  to  the  total  costs  of  production,  as  that 
part  of  expense  which  is  unescapable  and  which  goes  on  hourly 
and  daily  whether  the  factory  is  running  full  or  slack,  or  is 
totally  idle,  fixed  charges  require  some  equitable  plan  of  distri- 
bution. 

Fixed  items  of  expense,  strictly  speaking,  do  not  exist.  Only 
in  a  relative  or  temporary  sense  may  any  expense  be  regarded 
as  invariable.  Take  interest  on  investment.  While  the 


COMPILING  FIXED  CHANGES 


capital  remains  the  same,  this  charge  is  constant.  But  the  invest- 
ment is  continually  changing  as  new  equipment  is  added,  build- 
ings are  extended  and  the  quantity  of  stores  on  hand  diminishes 
or  increases.  Moreover,  the  interest  rate  itself  is  a  variable.  So 
then,  interest  charges  —  the  most  fixed  of  all  fixed  charges  —  are 
not,  in  the  absolute  sense,  fixed  at  all.  Relatively  they  may  be- 
come even  more  variable  as  through  more  intensive  utilization 
of  space  and  equipment  the  volume  of  business  increases.  The 
same  is  true  of  depreciation,  taxes  and  property  insurance,  all 
of  which  maintain  a  more  or  less  definite  ratio  to  the  amount  of 
capital  being  used  at  any  given  time.  Depreciation,  if  any,  is 
entitled  most  to  classification  as  a  variable,  since  it  depends  con- 
siderably on  the  character  of  maintenance  as  well  as  the  judg- 
ment shown  in  purchasing,  and  these  are  matters  of  manage- 
ment. In  an  accounting  sense,  however,  it  is  correct  to  consider 
all  these  things  as  fixed  expenditures.  They  are  fixed  because 
they  accrue  hourly  and  daily  whether  the  factory  is  doing  busi- 
ness or  not. 

Repairs,  for  accounting  purposes,  also  are  often  classified 
similarly,  especially  of  buildings,  as  regardless  of  plant  activity 
buildings  need  about  so  much  attention.  The  advantage  oJ: 
handling  repairs  in  this  way  is  that  each  month  then  bears  an 
equal  burden.  If  they  are  handled  as  variables  and  are  charged 
as  they  are  incurred,  one  month  will  carry  a  heavy  charge,  the 
next  one  perhaps  none  at  all.  Equipment  repairs  are  somewhat 
different,  as  these  depend  more  largely  on  the  character  and 
amount  of  use.  Therefore,  it  is  probably  better  in  the  average 
case  to  charge  them  currently. 

HOW  TO  PUT  A  FAIR  BURDEN  OF  FIXED  CHARGES 
ON  EACH  UNIT  OF  PRODUCT 

TT  IS  one  thing  to  determine  what  are  fixed  charges;  quite 
another  to  arrange  for  their  equitable  distribution.    The  aim 

is  to  have  each  unit  of  the  product  bear  its  due  and  proper  pro- 

portion of  the  total. 

Before  any  plan  of  distribution  can  be  formulated,  it  is  first 

necessary  to  determine  on  a  logical  division  of  the  business  into 

departments,  or  correlated  centers  of  production.    This  division 


COST-KEEPING  METHODS 


is  often  very  carelessly  done,  without  regard  to  the  logic  of  the 
situation.  Because  certain  groups  of  operations  are  housed 
within  the  same  four  walls,  it  does  not  follow  necessarily  that 
they  are  a  department,  in  the  accounting  sense.  Some  may 
involve  the  use  of  costly  machinery,  others  require  little  or  no 
equipment.  Bench  or  hand  operations  need  to  be  separate  from 
wholly  machine  operations.  A  piece  of  especially  costly  equip- 
ment, as  an  automatic  glue  jointer  in  a  woodworking  factory  or 
a  heavy  drop  press  in  a  sheet-metal  plant  or  the  cupola  in  a 
foundry,  is  a  department  in  itself.  It  is  improper  to  class  a 
battery  of  grinding  machines  with  a  group  of  drill  presses, 
because  the  one  is  a  heavy  user  of  expensive  materials  while 
the  other  is  not.  A  group  of  automatic  screw  machines,  punch 
presses,  engine  lathes,  looms  or  furnaces  forms  a  natural  depart- 
ment. Dissimilar  units  but  not  differing  widely  in  cost,  as 
woodworking  machines  in  a  mill  room  or  shoe  machinery,  may 
on  the  other  hand  be  grouped  together  without  sacrificing  prac- 
tical accuracy.  So  the  first  step  is  to  work  out  these  natural 
groupings.  At  the  same  time  the  floor  space  occupied  by  each 
may  well  be  determined. 

When  this  is  done  find  the  total  value  of  the  equipment  in 
each  such  department.  Sometimes  an  appraisal  may  be  neces- 
sary, as  already  outlined  in  the  previous  chapter.  If  the  inven- 
tory of  plant  and  equipment  has  been  indifferently  kept,  and 
cannot  easily  be  subdivided  and  adjusted  for  depreciation  and 
additions,  then  by  all  means  this  expert  valuation  is  needed. 
Otherwise  the  foundation  of  your  entire  cost  system  will  be 
unsound. 

Thereafter,  the  wise  policy  is  to  operate  a  running  appraisal. 
At  the  beginning  of  each  year,  the  fixed  charges  under  this  plan 
can  easily  be  readjusted  to  date. 

These  charges  divide  naturally  into  two  classes  —  space  charges 
and  equipment  charges.  The  first  distributes  most  accurately 
on  the  square  foot  of  floor  area;  the  second  on  the  value  basis. 
Thus  the  charges  on  the  structure  itself  class  as  space  charges, 
while  those  on  the  machinery  fall  into  the  value  division. 

For  practical  purposes  it  is  correct  to  consider  both  kinds  of 
charges  as  unvarying  throughout  any  given  fiscal  year.  Addi- 
tions in  the  meantime  will  cause  a  slight  error,  but  whatever 


COMPILING  FIXED  CHARGES 


123 


I! 


* 


3  & 


o,  (^ 


S$ 


'O* 


Uo. 


«^ 

H 


^5 


fe 


J-i 

111 
II! 

ri 
iii 


1 


-r 


y 

a? 


124 COST-KEEPING   METHODS 

the  discrepancy,  it  is  easily  handled  through  adjustment 
accounts. 

Having  determined  the  charges  for  the  ensuing  year,  you  will 
next  need  to  divide  them  by  the  number  of  book-closing  periods,  in 
order  to  arrive  at  the  monthly  or  period  charges  to  assess  against 
the  costs.  Monthly  closings  are  now  general.  A  more  scientific 
division  is  into  thirteen  periods  of  four  weeks  each,  the  objection 
to  which  of  course  is  that  it  is  out  of  accord  with  the  calendar. 
Where  the  payroll  is  weekly,  this  plan  is,  however,  entirely 
practical,  but  where  payment  is  bi-monthly,  the  twelve-period 
division  gives  accurate  comparisons.  In  some  lines  of  business 
even  quarterly  closings  may  answer  every  purpose.  It  all 
depends  on  how  rapidly  the  material  is  turned  over.  But  the 
twelve  or  thirteen-period  division  meets  the  conditions  in  the 
majority  of  cases. 

You  are  now  ready  to  draw  up  the  distribution  sheets  of  fixed 
charges.  List  the  departments  at  the  left  (Form  XLIV),  place 
after  each  its  share  of  the  floor  space,  find  the  proportion  of 
each  to  the  total  area  and  set  down  the  percentages  in  the  third 
column.  If  some  of  the  departments  occupy  more  valuable 
space  than  the  rest,  then  it  is  first  necessary  to  weight  the  areas 
according  to  their  relative  values.  For  instance,  if  department 
A  is  quartered  in  a  building  worth  a  dollar  a  square  foot,  while 
the  value  of  the  space  in  the  rest  of  the  plant  is  only  fifty  cents 
a  square  foot,  then  in  arriving  at  the  total  area  upon  which  to 
base  apportionment,  area  A  needs  to  be  taken  twice. 

As  will  be  seen  from  Form  XLIV,  the  share  of  the  various  fixed 
charges — interest  on  investment,  depreciation,  taxes  and  insur- 
ance— to  assess  against  each  department  is  then  obtained  by 
multiplying  the  total  amounts  of  each  by  the  various  depart- 
ment percentages. 

Columns  also  are  shown  for  administrative  expense  and  for 
repairs.  What  will  be  the  bill  for  repairs  can  of  course  only  be 
approximated.  At  the  end  of  the  year  the  aggregate  may  be 
greater  or  less  than  you  have  assumed.  Whichever  way  the 
difference  lies,  it  is  easily  disposed  of  through  profit  and  loss  or, 
better,  by  distributing  it  over  the  ensuing  year  as  an  increment 
or  a  decrement  to  the  previous  monthly  or  period  charge.  The 
other  way,  charging  into  the  costs  only  the  actual  expense 


COMPILING  FIXED  CHARGES 125 

incurred  for  repairs  in  any  month,  means  that  the  amounts  will 
vary  widely  from  month  to  month  and  thus  accentuate  the 
fluctuation  in  your  costs. 

This  disposes  of  that  portion  of  the  fixed  charges  that  dis- 
tributes on  a  space  basis.  On  the  right  hand  of  the  same 
sheet,  or  on  a  similar  one  (Form  XLV),  next  line  up  the  value 
charges  in  the  same  manner.  List  opposite  each  department 
the  total  value  of  the  equipment  therein.  Find  the  percentage 
of  each  to  the  sum  and  apportion  the  equipment  interest,  depre- 
ciation, taxes  and  insurance  accordingly.  If  one  department 
houses  machinery  that  depreciates  more  rapidly  than  the  average, 
it  is  of  course  necessary  to  weight  it  as  before.  For  if  it  depre- 
ciates, say,  twice  as  rapidly,  then  it  is  no  more  than  just  that  it 
bear  its  proportionately  greater  share  of  interest,  taxes  and 
insurance  as  well  as  its  entire  abnormal  burden  of  depreciation. 
This  is  the  same  as  considering  that  it  represents  twice  as  much 
investment.  In  the  example  given,  ten  per  cent  is  taken  for  the 
average  depreciation,  while  twenty  per  cent  is  assumed  for 
Department  A. 

Again,  the  equipment  in  one  department  may  involve  an 
unusual  accident  hazard,  as  flywheels  in  a  power  house  or  some 
process  using  explosive  materials,  for  which  a  special  insurance 
is  carried.  The  tax  for  this  insurance  obviously  is  a  separate 
charge  against  that  particular  department.  Department  B  in 
the  example  given  is  assumed  to  have  such  a  risk  and  has  an 
extra  charge  of  twenty  dollars. 

On  the  sheets  shown,  the  apportionment  has  first  been  made 
on  a  yearly  basis,  then  the  several  department  totals  divided  by 
twelve  (or  the  number  of  closing  periods  chosen).  This  has 
been  done  to  promote  accuracy  in  calculation,  as  many  of  the 
amounts  are  small.  The  monthly  or  period  totals  might  just  as 
well  have  been  taken  and  thus  the  final  cross  totals  made  to  rep- 
resent the  monthly  charges,  without  a  further  operation  of  divi- 
sion. It  is  obviously  immaterial  which  way  it  is  done — the  end 
is  the  same. 


XI 

EXPENSE  ANALYSIS  AND 
DISTRIBUTION 


MANUFACTURING  expense,  or  burden,  comprises  all 
those  items  of  expenditure  which  cannot  be  assessed 
directly  against  the  unit  of  production,  but  must  be 
distributed,  or  prorated  over  the  direct  cost  in  such  a  manner 
that  each  unit  bears  its  just  and  proper  proportion  of  the  total. 
It  includes  both  fixed  charges,  discussed  in  the  preceding 
chapter,  and  such  other  items  of  expense  as  the  current  activity 
of  the  plant  entails.  These  other  items  are  commonly  known  as 
the  variables  of  expense  (Figure  VI),  because  they  vary  with 
the  volume  of  business  and  cease  altogether  when  the  plant  shuts 
down.  They  are  also  called  controllables,  as  distinguished  from 
uncontrollable,  or  fixed  expenses,  because  in  the  average  case 
good  management  can  reduce  them. 

In  compiling  the  variables  of  expense,  therefore,  two  purposes 
must  be  kept  in  mind.  One  is  to  arrive  at  some  ratio  or  charge 
which  can  be  annexed  conveniently  to  the  direct  charges — 
applied  labor  and  material,  and  which  with  practical  accuracy 
completes  the  cost.  The  other  is  to  throw  the  figures  into  such 
comparative  form  that  the  busy  manager  can  note  the  fluctua- 
tions from  month  to  month  and  so  focus  on  reducing  excessive 
items.  In  other  words,  one  purpose  is  cost  finding,  the  other 
cost  control. 

As  in  preparing  the  sheet  of  fixed  charges  the  logical  division 
of  the  plant  into  departments  is  assumed  to  have  been  accom- 
plished, the  next  step  is  to  lay  out  for  each  department  an  ex- 
pense analysis  sheet,  as  mentioned  in  the  previous  chapter.  A  con- 
venient and  much  used  design  for  this  is  shown  in  Form  XLVI. 


A  complete  record  of  the  labor  co.st  is  made  from  a  set  of  cards  (upper  right),  filled  in  from  the 
information  flashed  on  the  annunciator.  The  cost  of  materials  is  kept  on  a  separate  set  of  cards. 
The  telephone  operator  punches  the  cards  for  the  tabulating  machine  and  mechanical  sorter  shown 
below.  Job  labor  cost  only  is  recorded  by  the  annunciator.  Payroll  time  is  recorded  by  the  clocks 


EXPENSE  DISTRIBUTION 129 

At  the  left  is  a  wide  column  for  the  items  of  expense,  both  fixed 
and  variable.  If  these,  in  common  with  the  buildings,  depart- 
ments, machines,  tools,  and  stores,  have  been  symbolized,  as 
indeed  they  may  well  be  to  save  clerical  work,  a  much  narrower 
column  will  answer.  Next  is  a  column  for  the  last  year's  total, 
and  another  for  the  average  month  of  the  year  previous — valu- 
able as  a  standard  of  comparison.  Then  follow  a  series  of 
double  or  triple  columns  for  the  months  of  the  year,  in'  the  first 
of  which  the  figures  for  the  month  are  set  down  and  in  the 
second,  the  cumulative  totals  to  date.  With  the  second  series, 
a  column  is  added  to  carry  the  average  month  to  date. 

Sometimes  before  the  double  columns  begin,  another  single 
column  is  interposed  for  the  estimated  average  monthly  figures, 
or  appropriated  expense.  When  sufficient  time  has  elapsed  to 
set  up  standards  for  the  various  items,  this  column  may  well 
be  added  to  establish  a  quota.  Again,  four  instead  of  three 
columns  are  sometimes  provided  in  the  sections  that  follow,  the 
additional  column  being  for  the  "  Same-Month-Last-Year. ' '  To 
get  every  possible  comparison,  still  another  column  may  be  pro- 
vided, for  the  ' ' Last-Year-to-Date. "  The  month's  expense  may 
then  be  compared  with  the  same  month  the  preceding  year,  the 
average  month  last  year,  and  the  estimated  average  for  the 
current  year;  and  the  period  totals  with  the  corresponding 
totals  of  the  year  before.  Such  a  complete  presentation  may  be 
extremely  helpful  in  some  businesses,  and  probably  worth  while 
eventually  in  every  case ;  but  in  the  beginning  the  simpler  form 
usually  will  answer  every  requirement. 

In  figuring  costs  the  first  month  of  a  new  year,  the  ratio  of 
expense  or  hourly  charge  to  combine  with  the  direct,  flat  or 
prime  cost,  is  based  on  this  month's  expense.  Thereafter,  the 
period-to-date  totals  are  taken.  Thus  an  increasingly  equalized 
ratio  or  charge  is  obtained  and  monthly  fluctuations  are  dis- 
counted ;  a  more  stable  cost  results. 

Sheets  for  the  auxiliary  departments — as  the  office,  power 
house,  pattern  shop,  and  construction  and  repairs  depart- 
ments, which  are  necessary  to  the  operation  of  the  plant,  but  do 
not  actually  work  on  the  product — are  made  out  first,  as  these 
must  be  absorbed  into  the  manufacturing  departments  proper. 
These  do  not,  however,  provide  for  all  the  expense  that  cannot 


130 


COST-KEEPING   METHODS 


be  assessed  directly  against  a  producing  department.  Over- 
laying all  are  certain  general  items — general  supervision,  general 
clerical,  general  yard  and  general  utility  labor,  watchmen,  liabil- 
ity insurance,  supplies  used  about  the  premises  as  a  whole, 
receiving  labor,  incoming  freight  and  cartage  and  storeroom 
expenses — which  must  first  of  all  be  assembled  and  distributed 
in  such  a  manner  that  each  department,  direct  or  indirect, 


Absorbing  Expense  of  Indirect  Departments 


FIGURE  VIII:  All  expense  must  eventually  be  shouldered  by  the  producing  departments.  Gen- 
eral factory  overlays  all  departments,  as  does  power,  construction  and  repairs,  and  fixed  charges. 
General  factory  absorbs  office  expense  and  is  in  turn  absorbed  by  the  other  departments,  usually 
according  to  direct  labor.  Power  is  distributed  according  to  use,  construction  and  repairs,  as  shown 
by  the  material  and  labor  reports,  fixed  charges  on  a  basis  of  space  and  equipment  values  in  the 
several  departments.  The  accuracy  of  distribution  depends  on  the  care  with  which  the  producing 
operations  are  grouped  to  form  departments 

receives  its  proper  share  of  the  total.  Office,  or  administrative 
expense,  too,  is  most  conveniently  handled  as  a  part  of  general 
expense,  although  it  is  compiled  on  a  separate  sheet,  as  a  share 
of  it  properly  is  chargeable  to  commercial,  or  selling  expense 
(Figure  VIII).  In  charging  a  department  like  office,  which  is 
absorbed  into  general  factory  expense,  with  its  prorata  of  another 
auxiliary  department,  say  ' 'Power/'  which  also  takes  a  share 


EXPENSE  DISTRIBUTION 131 

of  the  general  factory  total,  the  per  cent  to  cover  the  factory 
total  is  not  added  to  the  office  charge. 

Shipping  expense  is  another  item  sometimes  charged  to  general 
factory  expense,  but  prevailing  practice  treats  it  as  an  element 
of  selling  expense.  Which  is  proper  is  determined  largely  by 
your  manufacturing  problem.  If  you  are  making  to  stock  and 
shipping  is  more  or  less  intermittent,  then  this  item  is  unques- 
tionably a  selling  expense.  But  if,  like  Ford,  you  ship  out  parts 
as  fast  as  they  are  produced,  to  assembly  plants  in  other  cities, 
the  reverse  practice  is  probably  better.  It  all  depends  on  where 
you  consider  production  to  end  and  distribution  to  begin. 

Incoming  freight  and  cartage  is  another  debatable  item.  The 
simplest  way,  of  course,  is  to  handle  it  through  general  factory 
expense.  Adding  it  directly  to  the  material  cost  is,  however, 
more  accurate  (Figure  VI).  The  cost  of  a  car  of  coal,  lumber 
or  pig  iron,  for  instance,  is  not  the  price  f.  o.  b.  the  shipping 
point,  but  the  cost  actually  delivered.  Some  even  add  unloading 
and  binning  charges.  Coal  always  may  best  be  so  handled,  but 
when  there  is  no  great  diversity  in  the  factory's  supply,  account- 
ing certainly  is  simplified  and  accuracy  not  seriously  sacrificed 
by  charging  transportation  to  general  factory  expense. 

A  similar  line  of  reasoning  applies  to  storeroom  expense. 
This  is  absorbed  most  simply  through  general  factory.  In  case 
of  a  finished  stock  storage,  in  a  strictly  stock  manufacture,  so  to 
do  is  also  accurate.  A  raw  material  or  a  supply  storage  serving 
one  department  would  be  a  charge  against  the  specific  expense 
of  that  department,  not  against  the  factory  general;  while  a 
storeroom  catering  to  a  number  of  associated  departments — each 
of  which  produced  a  finished  product  independently — would 
have  its  expense  distributed  among  those  departments  in  the 
ratio  of  the  value  of  stores  issued  to  each.  What  is  the  proper 
way  to  handle  this  item  in  a  given  case  thus  depends  altogether 
on  conditions. 

PROBLEMS  INVOLVED  IN  THE  DISTRIBUTION 
OF  FACTORY  GENERAL  EXPENSE 

A  GAIN,  a  diversity  in  practice  also  exists  on  the  point  of  the 

indirect  departments  assuming  any  of  the  factory  general. 

In  a  management  sense  it  is  hard  to  see  why  indirect  as  well  as 


COST-KEEPING  METHODS 


EXPENSE 


DEPARTMENT 


ITEM 


LAST  YEAR 
TOTAL 


AV.  MONTH 
LAST  YEAR 


MONTH 
ENDING 


MONTH 
ENDING 


YEAR  TO 
DATE 


MONTH 
ENDING 


YEAR  TO 
DATE 


161-OP.OQ 


Xil4 


OJL 


GK*S»*~J)  ^stao^^ 


-fe^UW 


<0 


•\a»^u-v^^ 


<V^i^H 


_iJJjMl 


Ufa 


<R.^f 


=il£ 


C.O 


3. 


^77 


•Mi- 


FORM XLVI:  Anfexpense  analysis  sheet,  like  the  one  shown  above  and  on  the  next  page,  for 
showing  comparisons,  is  prepared  for  each  department  in  one  factory.  Front  and  reverse  cover  the 
entire  year.  Various  expense  items  are  given  for  the  month  and  in  an  adjacent  column  for  the  period 

direct  departments  should  not  bear  their  fair  share  of  the 
general  burden.  On  the  other  hand,  the  producing  departments 
have  to  shoulder  it  all  in  the  end  anyhow.  Hence  why  not 
distribute  all  of  general  factory  directly  to  these  departments? 
So  the  adverse  argument  runs,  and  this  way  certainly  has 
accounting  ease  in  its  favor.  The  manufacturer  may  decide  for 
himself.  If  his  auxiliary  departments  are  unimportant  and  he 
buys  his  power,  then  the  simpler  method  is  the  one  to  adopt. 
If,  however,  he  has  an  expensive  power  plant  and  a  large  con- 
struction and  repair  department  where  he  builds  much  special 
equipment,  it  certainly  would  be  a  mistake  not  to  charge  the 
indirect  departments  with  their  fair  share  of  all  burden.  Sup- 
pose he  sold  some  of  his  power ;  then  he  would  be  cheating  him- 
self if  for  the  sake  of  an  accounting  short  cut  he  let  the  power 
house  off.  Distributing  all  of  general  factory  to  the  producing 
departments,  on  the  other  hand,  avoids  the  complexity  that 
arises  under  the  other  method,  due  to  the  fact  that  an  auxiliary 
department  may  contribute  to  the  total  of  general  factory.  To 


EXPENSE  DISTRIBUTION 


133 


ANALYSIS 

FROM   <^^.  \4r 


TO 


AVERAGE 
MONTH 
TO  DATE 


MONTH 
ENDING 

GUwJl 


YEAR  TO 
DATE 


AVERAGE 
MONTH 
TO  DATE 


MONTH 

ENDING 


YEAR  TO 
DATE 


AVERAGE 
MONTH 
TO  DATE 


MONTH 
ENDING 


YEAR  TO 
DATE 


AVERAGE 
MONTH 
TO  DATE 


lais 


HISJUI 


4* 


ThS 


4i 


-34. 


jp. 


Hi 


Llfl 


10 


25ft 


1547 


Ho>  ll 


<&o 


IV] 


to  date.     Also  the  average  month  to  date  is  given.    For  the  alert  executive  this  tabulation  forms 
an  effective  means  of  comparison  and  guidance  not  only  in  cutting  down  expense,  but  in  standard- 
izing similar  items  of  cost  throughout  the  departments  of  the  factory 

redistribute  a  portion  of  general  factory  to  it,  therefore,  makes 
an  awkward  accounting  problem. 

Factory  general  expense  is  distributed  to  the  various  depart- 
ments most  commonly  on  the  basis  of  the  direct  labor.  That  is, 
if  one  department  has  a  direct  labor  payroll  of  $1,000  and  the 
total  direct  labor  payroll  is  $10,000,  this  department  takes  one- 
tenth  of  the  general  burden.  It  also  is  sometimes  prorated  in 
the  ratio  of  the  floor  space,  a  department  occupying  one-tenth 
of  the  total  area  taking  this  proportion  of  the  expense.  Again, 
it  may  be  apportioned  according  to  the  number  of  direct-labor 
hours.  If  the  department  expense  is  so  distributed,  then  of 
course  the  general  expense  should  be  similarly  handled.  Only 
an  analysis  of  conditions  in  a  given  case  can  determine  which 
of  these  ways  or  some  other — a  quantity  basis,  for  instance — will 
be  closest  to  the  truth. 

Power  expense  is  distributed  to  the  departments  using  power 
on  actual  measurement  from  the  switchboard,  in  case  trans- 
mission is  electrical.  A  less  accurate  way  is  on  the  basis  of  the 
rated  horsepower  of  the  machines  in  the  different  departments. 


134 COST-KEEPING  METHODS 

When  the  plant  is  driven  from  a  line-shaft,  this  may  indeed  be 
the  only  practicable  method.  In  plants  where  each  department 
has  its  own  engine,  supplied  with  steam  from  a  central  boiler 
plant,  the  use  of  steam-flow  meters  affords  the  only  accurate 
means. 

Heat  and  light  are  often  grouped  with  power,  but  there  are 
cases  where  so  to  do  would  work  a  considerable  inaccuracy. 
Electric  lighting  can  easily  be  measured,  if  each  department 
is  on  a  separate  circuit.  Its  expense  can  at  least  be  distributed 
with  fair  accuracy  on  some  arbitrary  basis.  The  watts  in  each 
department  multiplied  by  the  average  hours  of  use  furnishes  a 
fairly  good  gage.  Heating  expense  is  most  easily  distributed 
on  a  space  basis.  If  some  of  the  ceilings  are  especially  high,  a 
corrective  factor  is  of  course  necessary.  So,  too,  if  there  is  any 
wide  difference  in  the  temperature  required,  to  be  absolutely 
accurate,  correction  should  likewise  be  made  for  variance  in 
the  character  of  exposure.  A  single-story  building  or  a  top 
story,  for  instance,  requires  more  heat  units  than  a  between 
story.  The  relative  amount  of  window  exposure,  and  the  thick- 
ness and  material  of  the  walls  also  make  a  difference.  Seldom, 
however,  is  the  bill  for  heating  of  sufficient  importance,  as  com- 
pared to  the  total  expense,  to  warrant  hair-splitting  methods  of 
distribution.  The  floor  area  corrected  by  the  story  height,  or 
the  cubic-feet  of  air  space  gives  adequate  results,  if  indeed  in 
the  average  case  you  need  to  consider  heating  separate  from 
power  at  all. 

Repairs,  if  made  by  the  construction  and  repair  department, 
are  charged  to  the  other  departments  on  the  indication  of  the 
material  and  labor  tickets  of  this  department.  The  department 
overhead  is  added  usually  as  a  per  cent  of  the  direct  labor. 
What  of  the  expense  of  this  department  is  not  thus  accounted 
for,  since  it  is  applied  to  betterment  work,  is  charged  to  better- 
ment, or  asset  accounts,  to  make  its  way  into  expense  as  a  fixed 
charge.  General  factory  is  not  added  to  that  portion  of  the 
construction  and  repair  expense  incurred  in  behalf  of  general 
factory. 

Before  coming  to  the  department  analysis  sheets,  certain  group 
general  sheets  may  be  necessary.  Often  contiguous  departments 
have  a  common  supervision,  inspection,  maintenance  and  clerical 


EXPENSE  DISTRIBUTION 135 

force,  also  space  which  cannot  justly  be  charged  against  any 
one.  Such  a  situation  requires  a  group  general  analysis  sheet. 
This  sheet  then  takes  the  share  of  factory  general  due  the  depart- 
ments in  the  group,  and  this  in  turn  is  distributed  over  these 
departments,  usually  on  the  basis  of  the  direct  labor. 

Each  subsidiary  sheet — indirect  or  group  general,  at  any  rate — 
after  the  various  items  of  fixed  and  current  expenses  have  been 
entered,  is  totalled  and  the  distribution  of  the  sum  placed  at 
the  bottom.  Thus  all  items  of  expense  not  directly  chargeable 
against  any  producing  department  are  put  in  shape  for  posting 
forward  to  the  expense  analysis  sheets  of  these. 

So,  then,  when  the  sheet  of  a  producing  department  is  com- 
pleted, with  its  share  of  factory  general  or  group  general,  share 
of  power,  heat  and  light,  share  of  repairs  and  in  addition  its 
own  fixed  charges,  indirect  labor,  supervision,  spoilage,  supplies, 
lamp  renewals  and  other  current  expenses,  the  sum  represents 
every  possible  item  of  expense  incurred  by,  or  in  behalf  of  the 
department  in  question.  Add  to  this  the  direct  labor  payroll 
for  the  month  and  you  have  the  total  cost  of  operation  minus 
the  material  cost,  or  the  amount  by  which  the  material  processed 
that  month  has  been  increased  in  value. 

One  more  step  remains — to  express  the  total  department 
expense  in  the  form  of  a  ratio  or  hourly  charge  which  can 
be  applied  to  the  direct  (or  prime)  cost  and  which  will  com- 
plete it. 

No  hard  and  fast  rule  can  be  laid  down  for  combining  the 
direct  and  indirect  cost  items.  Some,  following  merchandising 
practice,  add  manufacturing  expense  as  a  per  cent  of  the  com- 
bined labor  and  material  cost.  While  this  method  is  correct 
as  regards  selling  expense,  haphazard  use  of  it  in  factory  ac- 
counting has  led  to  some  very  absurd  results.  It  is  only  safe  to 
follow  when  the  factory  makes  one  standard  product  or  several 
that  are  uniform  in  material,  and  approximately  uniform  in  size 
and  amount  of  work  required.  Even  then  it  is  probably  better 
in  the  average  case  to  establish  the  expense  as  a  per  cent  of  the 
direct  labor. 

This  method  of  distribution  is  perhaps  the  simplest  and  the 
most  generally  employed.  Those  who  advocate  it  do  so  on  the 
ground  that  all  expense  is  incurred  on  behalf  of  the  direct,  or 


136 COST-KEEPING   METHODS 

producing  labor — to  keep  this  labor  occupied,  and  that,  there- 
fore, the  expense  will  vary  pretty  closely  with  the  amount  of 
direct  labor.  And  many  times  this  allocation  of  expense  is 
equitable.  It  would  be,  for  instance,  in  a  department  where 
machines  are  practically  identical  and  all  operatives  earn  about 
the  same  wages. 

On  the  other  hand,  if  the  rates  of  pay  vary  widely — as  is 
often  the  case  where  day  work,  piecework  and  apprentice  labor 
all  are  in  vogue — distribution  on  the  direct-labor-hour  basis 
would  be  more  accurate.  In  that  event  the  total  direct-labor 
hours  in  any  month,  as  shown  by  the  time  cards,  would  be  set 
down  below  the  total  of  expense  and,  by  dividing,  an  expense 
cost  per  hour  brought  out. 

There  is  a  third  common  method  of  distributing  expense — on 
the  machine  hour.  Under  certain  conditions  this  amounts  to  the 
same  thing  as  the  labor  hour,  if  the  division  into  departments 
for  expense  analysis  has  been  made  with  equipment  values 
strictly  in  mind.  Again,  the  machine  hours  are  sometimes  quite 
different  from  the  labor  hours,  as  would  be  the  case  with  a  group 
of  automatic  machines,  furnaces,  tumbling  barrels  or  other  con- 
tinuously-operating equipment  requiring  relatively  little  atten- 
tion from  labor  and  irregular  amounts  of  it.  The  labor  cost 
then  is  small  as  compared  with  the  equipment  overhead  and  the 
labor  hours  considerably  less  than  the  machine  hours.  Under 
such  conditions  the  logical  basis  of  distribution  is  the  machine 
hour. 

Getting  down  to  the  machine  hour  is  of  course  very  close 
analysis.  More  clerical  work  is  involved,  perhaps,  than  in  either 
of  the  other  two  methods  of  distribution  described;  but  where 
the  machine  cost  obviously  exceeds  in  importance  every  other 
element,  its  adoption  undoubtedly  is  profitable.  Every  operat- 
ing expense,  even  the  direct  labor,  in  this  case  is  regarded  as 
incurred  on  behalf  of  the  equipment  investment,  to  get  the 
most  returns  from  it. 

In  some  plants  both  the  machine-hour  and  direct-labor  plans 
are  followed.  General  factory  is  distributed  as  a  per  cent  of 
the  direct  labor,  while  the  department  expense  is  reduced  to 
a  machine  hour  charge.  This  is  on  the  theory  that  the  general 


EXPENSE   DISTRIBUTION 137 

overhead  is  incurred  chiefly  on  behalf  of  the  labor,  while  the 
department  expense  is  due  to  the  machines. 

In  other  instances,  a  division  is  made  between  the  items  of 
expense  which  will  accrue  whether  the  plant  is  operating  or 
not,  and  those  which  cease  when  production  stops  or  vary  closely 
with  the  plant  activity.  This  really  amounts  to  making  a 
separate  sum  of  the  fixed  charges  on  the  expense-analysis  sheets 
and  establishing  a  separate  per  cent  or  hourly  charge  for  them. 
The  advantage  of  this  plan  is  that,  in  times  of  stress  when 
the  margin  of  profit  must  be  sternly  sacrificed  in  order  to  keep 
the  plant  running  at  all,  the  cost  can  be  figured  with  only 
expenses  actually  incurred  added.  Taylor  called  this  the  limit 
cost.  It  is  the  point  below  which  you  cannot  afford  to  cut,  but 
by  going  this  low  you  lose  less  money  than  you  would  if  you 
shut  down  altogether  rather  than  lower  your  price.  It  is  the 
point  also  which  determines  whether  you  should  continue  making 
or  buy  outside. 

Expense  distribution  is  thus  seen  to  be  an  intricate  problem. 
Different  methods  are  not  so  much  alternative  as  they  are 
adapted  to  different  sets  of  conditions.  In  the  same  plant,  often, 
every  method  will  be  found  in  use,  each  fitting  the  requirements 
in  some  one  or  more  of  the  departments.  In  an  ironware  plant, 
for  instance,  distribution  on  a  material  basis  proved  more  equit- 
able for  the  foundry,  on  a  direct  labor  basis  for  the  cleaning 
and  machining  departments,  and  also  the  painting  and  packing 
departments;  while  the  machine,  or  furnace-hour  plan  suited 
conditions  most  nearly  in  the  enameling  shops.  No  plan,  there- 
fore, should  be  adopted  generally  in  any  case  without  a  careful 
study  of  conditions.  However,  the  underlying  scheme  is  the  same 
in  all,  and  the  methods  of  laying  out  the  expense-analysis  sheets 
herein  outlined  are  generally  applicable. 


XII 

COLLECTING  MATERIAL  AND 
LABOR  COSTS 


IN  providing  for  the  proper  accounting  of  labor  and  material 
charges,  it  is  essential  to  bear  in  mind  constantly  the  fact 
that  you  have  two  classes  of  charges  to  assemble.  First, 
the  labor  and  material  actually  applying  on  the  orders,  or  the 
direct  charges;  and  second,  the  labor  and  material  which  are 
so  general  in  nature  that  they  cannot  conveniently  be  assessed 
against  the  cost  of  any  one  order,  but  must  be  distributed, 
together  with  administrative  and  fixed  charges,  over  all  the 
orders  handled  in  a  given  period.  The  latter  are  indirect  charges 
and  make  their  way  into  the  cost  as  explained  in  the  preceding 
chapter. 

While  the  same  time  tickets  and  material-issue  slips  may  be 
employed  to  report  both  direct  and  indirect  charges,  having  a 
distinctly  different  form  for  each  class  simplifies  the  work  of 
accounting  and  cuts  down  the  chances  of  error.  This  is  less 
important,  perhaps,  with  the  material-issue  slips,  however,  as 
by  a  proper  system  of  charge  symbols,  these  can  readily  be 
divided.  The  convenience  of  both  shop  and  storekeeper  certainly 
is  served  by  having  only  one  kind  of  slip.  Different  colors, 
however,  are  often  adopted  to  distinguish  material  issued  from 
different  storages,  or  to  distinguish  between  material  jobbed  and 
material  processed  in  the  plant.  Raw  material  regularly  used 
in  large  quantities,  as  lumber,  pig  iron,  crushed  rock,  coal  and 
fuel  oil,  for  the  issue  of  which  a  requisition  would  only  be  red 
tape,  is  sufficiently  covered  if  reported  once  a  day  on  a  special 
form  by  the  foreman  in  charge. 

With  labor  the  situation  is  somewhat  different.     Usually  a 


^^^  _  MATERIAL  AND  LABOR  COSTS  _  ISO 

very  simple  time  ticket  will  answer  for  the  indirect  labor,  if 
indeed  the  time-clock  record  is  not  sufficient.  The  time  of 
supervisors,  and  clerks  especially,  needs  no  other  check.  Direct 
labor,  on  the  other  hand,  requires  a  more  or  less  complicated 
form,  which  carries  the  order  number,  operation  symbol,  piece 
name  and  number,  and  such  other  information  as  may  be  neces- 
sary to  identify  it  completely.  For  direct  labor  in  indirect 
departments  the  requirements  are  essentially  the  same  as  for 
the  direct  labor  in  the  direct,  or  producing  departments.  To 
make  the  time  tickets  of  a  different  size  or  different  color  is 
desirable,  however,  for  reasons  already  given.  If  the  number 
of  departments  is  not  too  great,  a  color  scheme  carried  through 
on  the  time  tickets  will  give  all  the  contrast  necessary. 

One  thing  that  should  always  be  avoided  is  to  have  both 
kinds  of  labor  reported  on  the  same  ticket.  If  a  man  does  both 
kinds  of  work  in  a  day,  the  best  plan  is  to  have  him  make  out 
a  separate  report  of  his  time  on  each,  on  the  proper  forms, 
even  though  the  daily  rather  than  the  operation,  or  job  time 
ticket  is  used.  His  two  tickets  can  then  be  compared  with  the 
time-clock  record  together,  but  separated  for  the  purposes  of 
cost  accounting. 

To  insure  without  fail  that  every  dollar  expended  for  labor 
and  material  is  accurately  reported  and  that  the  over-all  checks 
with  the  payroll  in  the  one  case  and  with  the  total  of  material 
disbursements,  as  shown  by  the  balance-of-stores  cards  or 
ledgers.,  in  the  other,  is  the  guiding  consideration. 

HOW  TO  ARRIVE  AT  THE  COST  OF  DIRECT  AND  INDIRECT 
MATERIALS,  WASTE  AND  SCRAP 


it  is  essential  that  material  be  issued  only  on 
serially  numbered  and  duly  authorized  requisitions,  with 
the  exception  previously  noted.  And  it  is  just  as  essential  that 
all  material  either  be  kept  in  locked  enclosures  in  charge  of  a 
responsible  person,  or,  if  in  open  storage,  be  closely  super- 
vised by  a  foreman  and  only  those  indicated  by  him  allowed 
to  draw  from  it.  Otherwise  material  is  bound  to  disappear,  to 
be  used  extravagantly,  and  to  be  accounted  for  loosely.  Close 
control  is  essential  to  correct  cost  finding.  Accurate  means  of 
portioning  out  materials  by  count,  weight,  volume  or  surface 


140 COST-KEEPING  METHODS 

measurement,  too,  is  requisite.  Many  an  inventory  has  failed 
to  balance  with  the  book  records  because  of  liberal  measures 
in  stores  issue,  with  the  result  that  book  profits  when  corrected 
have  been  diminished  to  the  vanishing  point. 

Another  essential  to  proper  material  accounting  is  standards 
of  consumption,  so  that  the  storekeeper  may  also  check  the 
correctness  of  quantities  requisitioned.  The  tendency  is  to 
overdraw  and  then  to  be  careless  with  the  left-over.  Carefully 
prepared  bills  of  material  furnish  a  check  in  the  case  of  applied 
materials.  As  for  materials  that  class  as  supplies,  or  indirect, 
rating  the  foremen  according  to  their  consumption  of  such  can 
be  relied  upon  to  make  them  careful  to  scrutinize  every  request 
before  they  attach  their  signature  in  approval.  In  time, 
standards  can  be  set  even  for  these,  definitely  guiding  not  only 
the  foremen  but  also  the  storekeeper. 

Direct  material  that  is  processed  brings  up  the  further  ques- 
tion of  waste.  The  amount  of  material  in  a  finished  product  is 
almost  never  the  same  as  that  started  with.  Of  course,  the 
weight  of  an  assembled  product  is  equal  to  the  sum  of  the  weights 
of  its  parts;  but  the  parts  themselves,  through  drilling  and 
machining,  represent  a  certain  shrinkage  from  the  original 
volume.  Nuts,  for  instance,  are  made  up  from  rod-stock. 
Sawing,  drilling,  tapping  and  finishing  may  remove  a  third  or 
more  of  the  raw  material.  The  waste,  that  which  can  be  col- 
lected, has  only  a  fraction  of  the  value  of  the  stock.  A  small 
percentage  can  never  be  accounted  for.  In  order  properly  to 
price  the  material  in  the  finished  product,  it  is  therefore  neces- 
sary to  record  the  weight  of  the  finished  good  pieces  as  well  as 
the  stock  issued  against  the  order,  find  the  ratio  between  the  two 
and  increase  the  listed  price  accordingly.  The  reclaimable  waste 
is  a  legitimate  credit  at  its  scrap  value,  but  seldom  is  it  prac- 
ticable to  carry  the  accounting  into  such  detail.  The  scrap  is 
simply  pooled  with  other  similar  scrap  and  when  sold  or 
remelted  is  credited  to  the  department  or  general  expense,  as 
the  case  may  be.  Jewelry  manufacture  furnishes  about  the  only 
exception.  Here  the  material  is  so  valuable  that  it  pays  to  keep 
close  tab  on  the  waste  resulting  from  each  single  operation  and 
to  charge  to  the  order  only  the  actual  amount  of  material  in 
the  finished  article  plus  the  unaccountable  loss. 


MATERIAL  AND  LABOR  COSTS 


141 


Mon.  |  Tues.  j  Wed. 

Thur, 

Fri. 

Sat  [  Sun.  j 

DAY          Direct  Day  Work        NIGHT 

Date                                                "I 

m 

5.36 

5.42 

5.48 

5.54 

6 

6.06 

6.12 

6.18 

674 

in 

6.36 

6.42 

6.48 

654 

7 

7.06 

7.1? 

7.18 

724 

Name                                     Ho. 

7JO 

7.36 

7.42 

7.48 

754 

8 

8.06 

8.12 

8.18 

8.24 

Order  *•                       P«t  Him. 

8.30 

8.36 

8.42 

8.48 

854 

9 

ft06 

9.12 

9.18 

924 

MM 

9.30 

136 

a42 

9.48 

9.54 

10 

10.06 

10.12 

10.18 

1024 

KL30 

10.36 

ta42 

10.48 

1054 

11 

11.06 

U.12 

11.18 

11.24 

Operati 

in 

1UO 

11.36 

11.42 

11.48 

11.54 

12.00 
12.30 

12.36 

12.42 

12.48 

1254 

I 

1.06 

1.12 

1.18 

1.24 

130 

1.36 

1.42 

1.48 

154 

Pieces 
Hours 

Finished 

2 

2X16 

2.12 

2.18 

224 

2.30 

2.36 

142 

2.48 

254 

3 

3.06 

3.12 

3.18 

3.24 

130 

3.36 

142 

3.48 

3.54 

Hour  Rate 

4 

4.08 

4.12 

4.18 

4.24 

4.30 

4.35 

4.42 

4.48 

454 

5 

5.06 

5.12 

5.18 

524 

5.30 

5.36 

5.42 

5.48 

554 

'I       1 

A.M.1 
Fill 

6 

6JDS 

6J2 

6.18 

624 

6.30 

6.36 

6.42 

6.48 

654 

Foreman 

Use  This  Ticket  fur  Day  Work 

Talfy  Time  Ticket 

Date 

0 
00 

1 
06 

2 
12 

3 
18 

4 
24 

5 
30 

6 
36 

7 
42 

B 
48 

9 
54 

Symbol 

Time 

6 

Tally 

Total  Pb's 

Order  No. 

7 

Symbol 

8 

Tally. 

Man's  No. 

9 

Symbol 

18 

Tally 

Position 

11 

Symbol 

1  Helper's  No, 

12 

Tally 

1 

Symbol 

2  Helper's  No. 

2 

Tally 

3 

Symbol 

3  Helper's  No. 

4 

Tally 

5 

Symbol 

fc**fr 

6 

Tot, 

3l 
9 

Hours 

enths 

O.K. 

Tally 

lira 

T.K, 

FORMS  XLVII  and  XLVIII:  These  two  time  tickets  were  designed  to  minimize  pencil  work. 
The  day  is  divided  into  six-minute  periods,  or  tenths  of  hours.  Crosses  in  the  proper  squares  indi- 
cate the  starting  and  stopping  time  on  each  job.  The  elapsed  time  is  computed  quickly  by  count- 
ing down  for  the  hours  and  across  for  the  tenths.  The  upper  form  is  a  job  time  ticket,  while  the 
lower  is  arranged  to  serve  for  as  many  jobs  as  there  are  recording  spaces  to  the  right.  In  this  case 
the  same  cross  that  serves  to  indicate  the  stopping  of  one  job  indicates  the  start  of  another 

Lumber,  particularly,  furnishes  a  difficult  problem  of  account- 
ing for  waste.  In  the  average  woodworking  factory,  fully  forty 
per  cent  of  the  material  disappears  in  the  course  of  production. 
The  most  variable  and  at  the  same  time  biggest  loss,  of  course, 


142 COST-KEEPING  METHODS 

occurs  at  the  cut-off  saw,  because  of  knots  and  other  imper- 
fections in  the  wood,  which  must  be  cut  out.  Bad  ends  yield 
another  loss.  The  ingenuity  of  the  cutter  in  sawing  to  best 
advantage  plays  an  important  part.  Then  at  every  stage  of  the 
working,  until  the  parts  are  ready  to  assemble,  the  stock  is  still 
further  reduced  by  sawing,  planing,  jointing,  mortising  and  so 
on.  Some  pieces  will  be  spoiled  en  route.  The  net  board  feet 
remaining  from  all  these  operations,  which  you  can  exchange 
for  customers '  money,  seldom  exceeds  sixty  per  cent  of  the  quan- 
tity delivered  from  the  Mln.  Many  manufacturers,  having  found 
from  experience  that  such  a  percentage  is  approximately  true, 
never  bother  to  get  closer.  That  is  a  mistake.  Accurate  account 
should  be  kept  of  the  waste  from  year  to  year  on  every  grade 
of  lumber  handled.  Each  grade  can  then  be  charged  with  its 
proper  percentage  and  incidentally  cheap  grades  will  probably 
be  found  expensive.  More  than  one  woodworker  has  found  it 
profitable,  as  the  outcome  of  such  accounting,  to  buy  dimension 
stock,  because  the  percentage  of  waste  on  ordinary  lumber 
added  more  to  the  cost  of  the  product  than  the  additional  price 
of  the  sized  and  selected  material. 

This  in  general  is  the  value  of  a  common-sense  accounting 
for  waste  in  manufacturing.  Not  only  do  you  get  closer  to  the 
truth  in  your  costs — an  essential  in  a  competitive  business,  but 
you  develop  the  true  economy  of  your  raw  material  purchases. 
It  is  ultimate,  not  first  costs  that  count. 

So  proper  running  records  need  to  be  maintained  of  the 
waste  on  every  kind  of  material  which  cannot  be  definitely 
determined  by  the  simple  process  of  weighing,  measuring  or 
counting  each  time,  and  ratios  ascertained,  based  on  average 
conditions,  by  which  the  material  price  can  be  increased  for 
cost  accounting  purposes. 

Allowance  for  scrap  and  waste  from  stock  can  be  credited  to 
general  expense,  or  if  salable,  to  the  material  account.  If,  as 
is  often  the  case,  a  valuable  by-product  is  developed,  it  is 
obviously  unfair  to  charge  the  full  percentage  of  waste  to  the 
principal  product.  The  manager  will  need  to  exercise  his  judg- 
ment, and  be  guided  by  conditions. 

Some  applied  materials,  such  as  glue,  lend  themselves  still 
less  to  accurate  accounting.  A  certain  amount  of  this  goes 


MATERIAL  AND  LABOR  COSTS 


143 


into  the  makeup  of  the  various  articles  coated.  Another  por- 
tion is  wasted.  How  much  is  applied  and  how  much  is  lost 
beyond  reckoning  is  indeed  a  difficult  matter  to  determine.  But 
by  recording  the  amount  of  glue  issued  to  the  department  in 
each  month  and  deducting  the  quantity  remaining  in  the  pots 


Distribution  of. 


From 


Bal.  in  Dept      Issued 


Leftover 


Actually  Used   Charge  Expense  Charge  Direct  Costs 


0) 
Article 


& 


Contacting 
Surface 


Output 


Surface 
Coated 
(2W3) 


(5) 

Percentage 
of  Total 


Total 


Per 


*t~~*u*  Requirement 


Estimated 


70 


A  70 


to 


/so 


70 


rf.s 


f 


7*0 


ft.  3 


1,00 


37.  /$ 


36 


/70 


100 


///./d 


C/.7L 


97.3 


Totals 


$0 


/00.00 


Ff.f 


FORM  XLIX:  Consumption  of  coating  materials  may  be  standardized  by  means  of  the  form  shown 
above.  This  provides  a  simple  method  of  recording  the  quantity  of  glue  used  by  one  department. 
Starting  with  an  exact  measurement  of  the  contacting  surface,  the  information  is  carried  column  by 
column  across  the  page.  The  figures  yield,  finally,  a  standard  of  economical  consumption  for  the 
department  concerned.  Any  quantity  used  above  the  standard  set  may  be  distributed  over  the 
product  as  a  direct  charge,  according  to  the  ratio  of  contacting  surfaces 

at  the  end,  the  amount  used  is  readily  ascertained.  Then  by 
multiplying  the  number  of  each  different  kind  of  product  that 
went  through  the  gluing  operation  that  month  by  the  unit  con- 
tacting surface  in  each  case,  a  sum  is  obtained  which  divided 
by  the  total  of  all  similar  sums,  gives  the  proportion  of  the 
glue  consumption  chargeable  to  each  class  of  articles.  It  is  then 
easy  to  find  how  much  glue  should  be  charged  against  the  cost 
of  each  article.  Coating  materials,  as  japan,  paint,  varnish, 
nickel,  copper  and  tin,  can  be  accounted  for  similarly.  If  there 
is  too  much  variance  from  month  to  month,  the  manager  can 
institute  an  investigation  to  learn  the  reason  and  thus  perhaps 
stumble  on  cost-cutting  possibilities  before  unrealized.  Some- 


144 COST-KEEPING   METHODS 

times  expense  materials,  as  grindstones  and  files,  can  be  appor- 
tioned on  this  basis  and  thus  redeemed  from  the  indirect  class. 
To  do  so  is  of  course  desirable  whenever  practicable. 

Evidence  of  material  and  supplies  issued  will  at  any  rate 
come  into  the  cost  department  on  material-used  reports  signed 
by  the  foremen,  or  requisition  forms  signed  by  the  store- 
keeper and  perhaps  also  the  foremen.  In  one  plant  the  further 
signature  of  the  superintendent  is  required,  but  this  seems 
superfluous  except  in  extreme  cases.  These  reports  are  first 
priced  and  extended,  then  assorted  to  order  number  and  expense- 
account  symbols.  The  prices  used  are  those  paid  for  the  actual 
material  drawn  from,  which  are  not  necessarily  the  latest  prices. 
A  later  price  is  only  used  after  the  material  on  hand  from 
previous  purchases  at  a  different  price  is  exhausted.  This  is  not 
the  universal  practice,  but  it  is  the  only  safe  and  sound  one. 
Once  the  requisitions  are  priced,  extended  and  sorted,  any  clerk 
with  an  adding  machine  can  in  a  few  minutes  find  the  total  cost 
against  a  given  order  number  or  expense  account.  A  rubber 
band  around  each  pile  of  tickets,  with  the  total  of  these  marked 
on  the  back  or  on  an  attached  slip,  and  they  are  ready  in  the 
one  case  for  the  cost-assembly  clerk  and  in  the  other  for  the 
expense-analysis  man.  Sometimes  to  furnish  a  steady  job  for 
one  clerk  and  avoid  having  the  cost  department  jammed  with 
work  at  the  end  of  the  month,  an  intermediate  distribution 
record  is  employed  (Form  L).  To  this  the  price-extended 
material  receipts  are  posted.  At  the  end  of  the  month  the  sheet 
is  totalled  and  the  sums  handled  as  before. 

ASSEMBLING  DIRECT  AND  INDIRECT  LABOR  BY  MEANS  OF  DAILY 
AND  JOB  TIME  TICKETS 

/BETTING  in  reliable  labor  reports  is  slightly  more  com- 
^^  plicated  than  material  accounting  as  it  is  wrapped  up  with 
proper  time-keeping  methods.  A  time  card  for  each  job  worked 
on  by  each  man  is  best  from  the  cost  clerk's  angle.  It  remains 
to  provide  an  accurate  means  of  recording  the  time-started  and 
time-stopped  on  each  job.  Having  the  men  do  their  own  timing, 
as  is  the  practice  in  some  plants,  rarely  produces  reliable  cost 
data  and  has  other  bad  features.  To  have  the  foreman  do  so 


An  accurate  appraisal  of  the  entire  investment  is  the  basis  for  an  accurate  cost  system.     Whether 
inventorying  material  or  equipment  in  the  shop  (above),  or  filing  information  in  a  perpetual  inven- 
tory (below),  accuracy  requires  that  every  symbol  used  shall  be  simple,  definite  and  brief,  if  it  is 
to  recall  the  thing  for  which  it  stands 


Cost  systems  should  fit  the  plant,  not  burden  it.     Two  men  with  comparatively  simple  equipment 
handle  the  cost  records  in  the  plant  shown  below.     In  the  middle,  four  clerks  do  the  same  work  with 
no  other  equipment  than  card  files.     A  larger  clerical  force  and  more  extensive  equipment  are  neces- 
sary in  the  cost  department  above 


MATERIAL  AND  LABOR  COSTS 


147 


also  is  unsatisfactory  in  general,  as  it  burdens  him  with  too 
much  clerical  work,  although  some  foremen  prefer  to  keep  the 
time  on  the  ground  that  it  gives  them  a  tighter  grip  on  their 
department.  Usually  the  best  results  are  secured  by  making  the 
time  keeping  a  separate  function  invested  in  a  department  clerk 
who  either  is  located  at  a  central  point  where  the  men  must  come 


OapvtiMtt_ 

•ration  

Distribution  of  Supplies 

0«y 

S3. 

Ittml 

Item  2 

Item3 

RM4 

ftraS 

Eii 

Item? 

Ittml 

KM  9 

IttmlO 

Item  11 

Ktmt2 

— 

Distribution  of  Supplies 

— 

Osy 

Dflpan 

ment,B|> 

station,  o 

Stk 

10 

1 

2 

31 

3 

^ 

[^ 

•'-H 

LL 

i~i- 

1 

1   - 

1     1 

\~~~i 

31 

' 

Tctds 

• 

FORMS  JL  and  JLI:  One  of  these,  sheets  (below)  is  needed  for  every  department,  operation  or 
machine  for  which  an  expense-analysis  account  is  opened.  To  it  the  material  issue  slips,  or  in- 
direct materials,  are  distributed  after  they  have  been  priced  or  extended.  A  monthly  grand  total 
forms  the  entry  to  the  expense-analysis,  or  each  separate  total  may  be  carried  forward  in  detail,  if 
necessary.  In  the  imall  factory  one  such  sheet  with  a  modified  heading  (above)  will  serve  for  all 
departments.  The  departments,  instead  of  the  various  supplies,  are  then  written  in  at  the  top, 
and  a  slip  for  each  day  then  entered  as  one  item 

to  him  at  the  stop  and  start  of  each  job,  or  who  spends  his  time 
out  on  the  floor,  seeing  not  only  that  the  time  is  promptly  noted 
in  each  case,  but  that  each  man  has  at  all  times  at  least  one  job 
ahead  in  the  clip  or  pocket  at  his  station. 

The  advantage  of  having  the  time  clerk  at  a  central  point  is 
that  he  can  then  employ  some  form  of  time-stamp,  even  one 
that  automatically  figures  the  elapsed  time  and  thus  saves 
clerical  work  later  on.  But  unless  the  trips  are  few  and  far 
between,  the  time  lost  by  the  busy  producers  in  going  back  and 
forth  will  more  than  outweigh  that  advantage. 

As  the  job  time  tickets  are  collected,  they  are  checked  over 
carefully  by  the  timekeeper  to  see  that  all  the  required  informa- 


148 


COST-KEEPING   METHODS 


tion  is  there,  then  signed  and  filed  in  the  man's  "work  done" 
pocket.  Next  morning  the  tickets  for  the  previous  day  are  bun- 
dled together  and  sent  to  the  cost  department.  Here  the  payroll 
clerk  first  checks  them  for  over-all  time  and  with  the  clock 


Recapitulation  of  Labor 

Month  o 

r 

NIL 

| 

t_ 

Data 

Day 

JobNft 

Total 

' 

•0 

ThuA 

FrL 

Sat 

— 

Binder 

0 

peration  Costs  Record     i 

From                   to 

'art 

Ka  

M/l 

Operation                             Mm                       Price 

Price 



0 

ate  Mai 

iRala°j 

der  Pat- 
io,   tern 

Good 
PVs 

Mrs. 

FotalCost 

Cost 
per_ 

P.W. 

.  Hr.  Ea. 

No. 

Date 

Man 

P.W. 
Hr.Ea. 

No. 
p.Hr. 



P, 

aycoll  Col 

Dei 

lection  Sheet 

>t 

NO.                        Rate 

Pate 

.191 

Lr- 

Dat 

Indirect  Labor 

Direct  Labor 

— 

•    De 

It  To  Other  De 

pts.  Pie 

ce 

rk 

Day 
Worl 

Rate  per         and  Pieces  Dona 

Hi 

i 

We 

I    10 

15 

25 

70 

— 

Mb 

Amts 

Totals 

FORMS  LJ.I-LIV:  Above  is  shown  a  convenient  form  for  summarizing  labor  costs  by  job 
numbers.  Intermediate  is  a  payroll  collection  sheet,  one  of  which  is  kept  for  each  man,  and  is  a 
complete  history  of  his  activity.  Made  up  from  the  time  tickets,  it  is  in  turn  the  basis  of  the  payroll. 
Below  is  another  type  of  labor  record,  also  posted  from  the  time  tickets,  but  after  these  have  been 
sorted  according  to  operation  and  part.  Its  chief  value  is  in  collecting  direct  and  indirect  labor 
costs,  which  in  turn  afford  a  basis  for  cost  control 

record,  then  fills  in  each  man's  rate,  computes  his  earnings,  adds 
the  premium  or  bonus  made,  if  either  of  these  payment  plans 
is  in  vogue,  and  transfers  the  total  to  a  payroll  collection  sheet 
(Form  LIV) .  The  tickets  then  go  to  the  cost  clerk  for  distribut- 
ing to  the  cost  summaries. 


MATERIAL  AND  LABOR  COSTS 149 

While  the  job  time  ticket  is  ideal,  frequently  the  jobs  worked 
on  by  a  single  man  in  a  day  are  so  numerous  that  to  have  a 
separate  ticket  for  each  different  job  is  impracticable.  Under 
such  circumstances  the  next  best  plan  is  a  ticket  a  day  for  each 
man.  Order  numbers,  name  or  symbol  of  article,  number  of 
pieces  and  other  necessary  information  can  be  filled  in  by  a 
department  clerk  if  the  work  is  so  planned  that  the  sequence  in 
which  the  orders  will  reach  the  machine  is  definitely  known  and 
on  record  in  the  department  office.  All  the  pencil  work  the  man 
then  has  to  do  is  to  fill  in  the  time  started  and  stopped  on  each 
job.  The  elapsed  time  is  computed  by  a  clerk  in  the  cost  depart- 
ment after  the  total  time  has  been  checked  with  the  clock  card 
by  the  payroll  clerk,  who  also  fills  in  the  man's  rating.  Then 
the  elapsed  times  are  multiplied  by  the  rate,  the  result  set 
down  and  the  ticket  is  ready  for  the  cost  summaries  as  before. 

THE  JOB  TIME  TICKET— AN  EXAMPLE  OF  THE  EFFICIENCY  VALUE 
OF  THE  COST  SYSTEM 

\\7  HEN  the  job  time  ticket  is  not  feasible,  it  is  fairly  good 
proof  that  the  plan  of  manufacturing  is  faulty.  It  usually 
means  either  that  too  great  a  variety  of  work  is  being  attempted 
for  economical  manufacture — or  that  the  jobs  are  not  properly 
planned  and  specialized.  Far-reaching  changes,  therefore,  may 
be  necessary  in  either  the  policies  of  the  house  or  the  production 
scheme,  or  both.  But  this  is  one  of  the  important  benefits  of  a 
cost  system.  In  trying  to  fit  the  system  wrong  practices  are 
disclosed,  the  correction  of  which  is  strictly  in  line  with  greater 
efficiency.  In  proportion  as  difficulties  are  encountered  in  get- 
ting accurate  time  reports  upon  which  to  figure  costs,  wrong 
conditions  may  as  a  rule  be  assumed  to  exist,  to  reform  which 
promises  considerable  savings. 

Again,  when  the  job  time  ticket  is  not  readily  adapted,  pay- 
ment by  the  piece  or  any  other  efficiency  plan  is  seldom  prac- 
ticable. Bonus  and  premium  methods,  particularly,  are  pred- 
icated upon  the  use  of  a  separate  card  for  each  operation,  and 
the  piece  rate  works  well  only  when  men  can  be  kept  busy  on 
the  same  work  for  long  stretches.  Then  the  job  ticket  is  appli- 
cable. 


150 COST-KEEPING  METHODS 

When  men  are  paid  by  the  piece,  it  is  true,  time  tickets  are 
sometimes  omitted.  The  clock  record  is  assumed  to  furnish 
check  enough.  But  this  is  a  mistake.  Regardless  of  how  a 
man  is  paid,  his  time  should  accurately  be  reported  on  all  jobs 
if  for  no  other  reason  than  to  circumvent  the  tendency  of  piece- 
workers to  work  or  loaf  as  fancy  takes  them.  While  in  the 
plant  they  should  be  busy  all  the  time  and  your  time  records 
will  show  whether  or  not  they  have  been.  You  also  want  to  keep 
tab  on  their  time  in  order  to  check  their  rates.  Moreover,  it 
frequently  happens  that  a  pieceworker  does  some  day  work  to 
eke  out  his  day.  A  time  report  on  this  is  essential.  Therefore 
it  is  on  the  safe  side  to  have  time  reports  regularly  covering  the 
entire  activities  of  each  pieceworker. 

With  indirect  labor  the  situation  is  somewhat  different  and  a 
separate  ticket  for  each  job  is  seldom  necessary.  One  ticket  for 
each  day  usually  answers  every  purpose.  Only  when  indirect 
labor  is  done  on  a  piece  rate  or  bonus  basis  is  it  necessary  to 
have  a  separate  ticket  for  each  job.  Weekly  tickets,  or  keeping 
the  time  in  a  weekly  or  bi-weekly  time  book,  is  in  some  cases 
sufficient.  It  depends  on  how  steadily  indirect  workers  are 
engaged  on  the  same  detail.  However  their  time  is  taken,  the 
procedure  in  the  office  is  the  same  as  described  for  direct  labor. 
The  reports  are  first  compared  with  the  clock  records,  then 
priced  and  extended,  either  singly  or  in  bunches  for  the  payroll 
period  and  distributed  to  the  payroll  collection  sheets  or  posted 
to  the  payroll  directly.  Finally  they  are  summarized  for  the 
expense-analysis  sheets. 

Another  question  is  in  regard  to  the  unit  upon  which  time 
records  are  to  be  taken.  Because  a  product  is  sold  by  the  pound 
it  does  not  necessarily  follow  that  the  labor  cost  should  or  can 
be  found  on  the  same  basis.  A  unit  of  measurement  should  be 
taken  which  is  strictly  proportional  to  the  time  consumed  in 
processing.  In  rolling  down  brass,  for  example,  not  pounds  nor 
bars,  but  the  lineal  feet  over  the  rolls  is  the  unit  which  squares 
best  with  the  time  elapsed.  Only  when  similar  objects  are 
processed  in  an  identical  manner  will  the  number  of  pieces  or 
the  pound  basis  give  accurate  results. 


XIII 

FINDING  THE  TOTAL  COST 
OF  THE  PRODUCT 


BUILDING  up  a  cost  has  been  discussed  in  the  preceding 
chapters  step  by  step:  first,  the  analysis  of  cost  into  its 
elements — material,  labor  and  expense;  then  the  comput- 
ing and  tabulation  of  the  fixed  charges;  next  their  combination 
with  the  variables  of  expense  and  the  proper  distribution  of  the 
sum;  finally  the  collection  of  the  material  and  labor  charges. 
It  remains  to  explain  the  methods  of  combining  the  direct  and 
indirect  items  to  get  the  total  cost  of  production. 

Where  these  steps  have  been  taken,  the  cost  department  then 
has  a  variety  of  information  gathered  from  different  sources, 
and  other  information  flowing  to  it  every  day,  carrying  for  its 
identification  the  order  number  to  which  it  pertains.  In  a  plant 
of  any  size,  it  is  impossible  to  maintain  an  organization  which 
will  check  or  verify  all  the  information  thus  obtained  from 
original  sources,  but  in  two  ways  a  check  can  and  should  be 
maintained  which  will  prove  effective,  if  carefully  made. 

To  the  cost  department  comes  a  record  of  all  labor  charged 
against  an  order  and  all  material  used  on  the  order.  The  labor 
items,  in  total,  should  agree  with  the  payroll  record.  This 
record  is  usually  taken  from  the  time-clock  cards  or  whatever 
other  method  is  used  to  ascertain  the  time  at  which  an  employee 
starts  and  stops  work. 

The  other  check  which  should  be  maintained  is  on  the  requi- 
sitions for  material  to  apply  on  work  orders.  These  should 
regularly  be  compared  with  the  corresponding  bills  of  material. 
Requisitions  for  supplies  should  also  be  entered  on  cards  so  that 
a  ready  comparison  can  be  made  of  one  month  with  another,  or 


152 COST-KEEPING  METHODS 

the  totals  drawn  off  for  this  purpose.  Any  unusual  call  for 
material  should  be  referred  immediately  to  the  superintendent 
for  investigation.  This  also  applies  to  the  labor  charges  on  all 
standing  expense  orders,  such  as  unloading  coal  at  the  power 
house,  loading  or  unloading  of  cars,  drayage,  sweeping,  and 
cleaning. 

All  plant  operations  are  now  divided,  according  to  the  records 
reported  to  the  cost  department,  as  follows: 

(1)  Raw  material  used  in  the  product,  including  scrap. 

(2)  Raw  material  used  as  supplies,  as  well  as  waste  and  other 

expense  materials. 

(3)  Direct  labor,  including: 

(a)  Operatives  actually  working  on  material  covered 

by  Item  1. 

(b)  Assistants  not  actually   operatives,  but  consid- 

ered as  direct  labor  and  who  have  their  time 
charged  to  work  orders. 

(4)  Overhead  for  special  tools,  if  any. 

(5)  Indirect  labor,  including  all  wages  and  salaries  charged  to 

standing  accounts,  but  not  to  work  orders. 

(6)  Maintenance  charges,  including  upkeep  of  buildings  and 

equipment,  interest,  insurance,  taxes  and  all  items  not 
covered  elsewhere  in  this  list. 

(7)  Office  expense  and  selling  expense. 

Items  (1)  and  (3)  are  charged  to  their  respective  order  num- 
bers and  form  the  basic  figures,  or  flat  cost  of  the  job.  Of 
course,  if  piecework  prevails,  the  piece  price  on  an  operation  is 
the  direct  labor  cost.  Often,  however,  the  same  operation  is 
done  under  both  piece  and  day  work,  or  part  of  the  month  one 
way  and  the  balance  the  other.  Then  it  is  necessary  to  find  the 
unit  cost  under  day  work  and  average  it  with  the  piece  price. 
Moreover,  if  the  set-up  is  not  allowed  for  on  the  pfece  price,  the 
latter  must  be  corrected,  or  the  difference  thrown  into  expense. 

BRINGING  TOGETHER  DIRECT  AND  INDIRECT  COSTS  INVOLVED 
IN  PROCESSING  MATERIALS 

HP  0  THE  labor  cost  at  any  rate  must  be  added  a  percentage 
of  itself,  or  an  hourly  charge,  which  will  represent  the 
share  of  that  job  in  all  the  other  activities  of  the  plant  as  repre- 
sented by  Items  (2),  (4),  (5)  and  (6).    Item  (7)  is  added  in 


COST  SUMMARIES 


153 


the  form  of  a  per  cent  based  on  the  total  thus  obtained  and 
completes  the  cost  to  make  and  sell.     The  share  of  the  office 


•o 


•o 


Lot  Cost  Analyst 


Totil 
Ttaii. 
m 


Entire 

Lot 


fcttfctet 


%  DKTMH  (Hack)  bcnm  ( 


J I         I         I 


I      -I         I 


FORMS  LV  and  LVI:  Two  different  types  of  final  cost  sheets  are  here  shown.  That  in  front  is  adapted 
for  a  part  or  an  article  cost  by  operations  on  steady  production  and  is  arranged  for  parallel  entries 
month  by  month.  To  the  combined  labor  and  expense  cost  is  added  the  material  cost,  giving  the 
total  cost  to  make.  The  back  form  serves  a  similar  purpose,  but  is  devised  to  present  more  detailed 
statistical  information.  The  cost  is  also  shown  by  order  numbers  and  lots,  rather  than  by  months, 
and  builds  up  valuable  evidence  on  the  most  economical  size  of  lot 

chargeable  to  the  factory,  however,  is  preferably  handled  as  an 
addition  to  items  (5)  and  (6)  as  already  indicated. 

Items  (2),  (5),  (6)  and  (7)  are  made  up  by  the  cost  depart- 
ment into  totals  for  a  given  period.  The  best  practice  favors 
monthly  adjustment  of  these  accounts,  although  it  is  frequently 
done  semi-annually  or  annually. 

For  the  period,  whatever  it  may  be,  the  total  for  item  (5) 
must  be  separated  into : 


154 


COST-KEEPING   METHODS 


(a)  Labor  directly  involved  in  handling  and  caring  for  raw 

material. 

(b)  All  other  indirect  labor. 

Item  (6)  must  also  be  separated  similarly  into: 

(a)  Fixed  maintenance  charges  on  equipment,  buildings  and 

other   space  devoted  to  storage  and  handling  of  raw 
material. 

(b)  All  other  charges. 

The  total  of  items  (5a)  and  (6a)  for  a  given  period  (usually 
a  year)  may  be  taken  as  a  percentage  of  the  total  charge  of 
item  (1)  for  that  period.  This  percentage  is  the  first  addition 
to  the  "flat  cost,"  and  is  to  be  added  to  the  total  of  item  (1) 
which  appears  on  every  work  order  number.  Sometimes,  as 
explained  in  Chapter  XI,  the  handling  and  storage  charges  on 


Cost  of  Alterations 

Octatt. 

1..     •"»..    1    ..*** 

!~~ 

Machine  Cost  Record        MB^H. 

Datilns    rt., 

i 

.    > 

Deta 

ICost 

Summary 

Prte. 

Oept 

HOOTS 

La  be 

T 

Burden 

Detail! 

Items 

'Total 

Erection  Cost 

Utaor 

tSS 

Description 

'Amount 

Factory  Cost 

FORMS  LVII  and  LVIII:    This  form,  in  use  by  an  adding  machine  manufacturer,  is  unusual  in 

several  respects.    On  the  front  it  gives  a  complete  cost  record  of  each  machine  produced,  while  on 

the  back  is  space  for  the  cost  of  any  alterations  that  subsequently  become  necessary.     Detail  cost, 

material  and  cost  summary  are  thus  brought  together  on  a  single  card  which  is  only  4x6  inches 

raw  material  are  combined  directly  with  items  (5)  and  (6). 
While  the  method  here  outlined  is  more  exact,  the  alternative 
is  simpler,  as  it  makes  one  figure  of  the  burden  and  that  applied 
to  labor  as  a  percentage  or  added  as  an  hourly  charge. 


COST  SUMMARIES 


155 


Of  course,  costs  will  fluctuate  from  month  to  month  and, 
theoretically,  the  percentages  charged  against  both  labor  and 
material  will  vary.  Practically,  however,  it  is  usually  sufficient 
to  regard  the  percentage  on  material  as  a  fixed  one.  When 


© 


I 
l  «»S«»w 


© 
Cost  Summary 


(J)-H«) 


load*  Track 


StilM    MsM         Tim 


tat!      Stntt    FMsntd 


ind  Cuttinz 


Ho.U_ 

No.18 
No.2lk. 


K».2B 


Tttol  CM!  »  Mite  ml  Sin 


FORMS  LIX-LXI:  Many  times  the  tag  which  serves  to  identify  and  route  material  in  process 
may  also  serve  to  collect  the  labor  costs  enroute.  At  the  right  is  a  tag  used  by  a  woodworking  estab- 
lishment to  collect  the  labor  cost  and  other  data  on  lumber  from  the  time  it  is  started  through  the 
kiln  until  it  leaves  the  cut-off  saw  on  product  order.  The  tag  at  the  left  is  employed  similarly,  but 
for  collecting  the  cost  on  material  in  process.  On  the  back  of  the  same  tag  all  the  cost  elements  are 

finally  brought  together 

figured  once  a  year,  it  may  be  found,  for  example,  that  (5a)  and 
(6a)  are  fourteen  per  cent  of  the  total  of  (5)  and  (6).  There- 
fore, on  each  month  through  the  year,  fourteen  per  cent  of  the 
total  of  items  (5)  and  (6)  is  calculated,  without  the  necessity  of 
analyzing  them  each  month.  A  further  per  cent  is  also  usually 
necessarv  to  cover  the  normal  material  waste,  as  explained  in 


156 COST-KEEPING   METHODS 

Chapter  XI,  although  this  item  is  often  thrown  into  expense,  in 
order  to  standardize  the  material  cost  (Chapter  XII).  The  loss 
due  to  spoilage  may  be  treated  as  an  expense  against  the  depart- 
ment where  the  loss  occurred,  or  it  may  be  absorbed  into  the 
cost  of  the  order  by  the  expedient  of  figuring  the  unit  cost  on 
the  basis  of  the  net  good  pieces,  pounds,  feet,  or  other  unit  of 
measurement.  Cost  summarizing  is  facilitated,  however,  if 
shortages  are  made  good  as  fast  as  they  occur,  so  that  the  full 
lot  comes  through.  Another  way  is  to  start  with  a  surplus 
which  experience  shows  will  offset  losses  en  route  and  then  base 
the  cost  on  the  finished  good  pieces.  Which  method  is  advisable 
depends  altogether  on  the  nature  of  the  order,  its  recurring 
frequency,  size,  and  likelihood  of  loss. 

Items  (2),  (5b),  and  (6b)  remain.  The  total  of  these  three 
for  any  department  for  the  month  may  be  taken  as  a  percent- 
age of  item  (3)  for  the  same  month.  This  percentage  is  the 
second  addition  to  the  "flat  cost,"  and  is  to  be  added  to  the 
total  of  item  (3)  which  appears  on  each  work  order. 

If,  on  any  work  order,  special  tools  were  used,  the  amount  of 
labor  (item  3)  applying  against  that  tool  must  be  shown,  and 
the  overhead  percentage  figured  on  it.  This  is  the  third  addi- 
tion to  the  flat  cost.  The  completed  cost,  therefore,  of  any  article 
of  manufacture,  as  shown  by  its  inclusion  in  the  limits  of  a 
single  work  order,  is  as  follows: 

Flat  cost  of  raw  material  (Item  1). 

Raw  material  burden. 

Flat  cost  of  direct  labor  (Item  3). 

Amount  of  overhead  for  any  special  tools. 

General  expense  on  labor  or  hourly  expense  rate. 
The  total  of  these  five  items,  taken  for  each  department  in 
turn,  is  the  cost  to  make. 

Manufacturing  orders,  whether  they  be  to  customer's  requi- 
sition or  to  stock,  so  long  as  they  are  put  through  singly  or 
in  lots  intermittently,  are  handled  as  outlined.  A  single 
article  or  lot  so  small  that  it  can  be  steered  with  a  route  ticket 
or  tag  (Form  LIX)  may  have  its  cost  assembled  right  on 
the  tag.  The  workmen  simply  record  their  time  on  the  tag,  the 
foreman  0.  K.  'ing  their  entries.  On  the  back  an  account  of  the 
material  applied  is  kept.  When  the  order  is  completed  and  the 
tag  is  returned  to  the  office,  the  various  entries  are  checked  (the 


COST  SUMMARIES 


157 


material  against  the  stock-issue  slips,  the  labor  against  the  daily 
or  job  time  tickets) ,  priced  and  extended.  The  proper  per  cent 
to  cover  overhead  is  added  and  the  cost  is  complete.  This  system 
is  particularly  serviceable  when  the  cost  of  a  special  order  is 
wanted  in  the  shortest  possible  time  after  its  completion. 


sheet  Na                              Part  Cost  Summary 

Part                 1  Symbol 

Order  Na  Lot  Na_  Quantity  _ 

_  .Order  Na  LotNa  Qu«rtlty  

Operation 

Lai 
Cost 

or 

Overhead 

Labor 
Cost  per 

Overhead 

ratal 

>4l(3J 

No.  or 
Symbol 

Name 

(2) 

Amount 

(3)          (f)  + 

(2) 

Amount 

(3) 

a 

(1) 

5)         (D 

Sheet  1 

to  Assembling  Cost  Summary 

Symbol 

Article 

Parts  Required 

'Order  Na 

Ord 

ir 

of 

Ma  

ILot  of 

Lot 

No.  or 
Symbol 

Name 

No.  per 
Assembly 

Unit 
Cost 

(Total 
Cost 

Unit 
Cost 

Total 
Cost 

1  

=^n 

h5^ 

=  E^^ 

UL 
rr 

IE 

EEr 

—-— 

Total  !Part«  Cost 

-~ 

Assen 

biy 

ihar 

f 

Totals 

ll 

o 

rerhaad 

Materl 

t- 

• 
iht 

T 

•M 

Painting 

AIlo  WMCB  for  MI  Waste..  
*.'             IB*. 

M 
I 

• 

aterial 

• 

ihor 

• 

/erhead 

.,%$    . 

Allowance  for  Mfg.  Waste..  

a. 

Total 

Packing 

iLahor 

tlvarhaait 

or  » 

Total  Material  Co»t 

Total 

Grand  Total  Cost  to  Make  

Grand  Total  Cost 

Cost  to  Make  god  Sell 

FORMS  LXII  and  LXIII:  These  two  forms  are  used  together.  They  are  devised  to  fit  built-up 
article  manufacture,  where  a  cost  summary  is  needed  on  each  part  and  again  for  the  assembling 
operations.  Parallel  columns  are  provided,  so  that  the  costs  on  different  lots  may  readily  be  compared 
for  purposes  of  control.  At  the  bottom  of  the  final  sheet  is  space  for  the  entry  of  the  selling  expense, 
so  that  the  grand  total  represents  the  total  cost  to  make  and  sell 

On  work  that  is  coming  through  regularly,  either  in  uniform 
lots  or  in  daily  quotas,  an  order  cost  serves  no  particular  purpose 


158 COST-KEEPING  METHODS __ 

and  the  best  method  is  what  is  called  an  operation  cost.  A  card 
or  sheet  (Form  LXII)  is  provided  for  each  different  operation. 
If  two  or  more  parts  undergo  identically  the  same  operation, 
they  are  grouped  on  the  same  sheet.  The  time  or  job  tickets, 
after  they  have  been  proved  with  the  clock  record,  priced  and 
extended,  are  distributed  on  this  record,  the  amount  being 
divided  by  the  number  of  good  pieces  reported,  to  obtain  the 
unit  cost  of  the  operation.  Whenever  the  manager  desires  to 
know  the  cost  of  any  part  or  article,  the  clerk  draws  a  closing 
line  and  determines  the  average  unit  cost.  If  the  order  number 
on  each  lot  is  also  noted,  the  manager  may  at  any  time  find  the 
order  cost  in  a  few  moments  of  time  simply  by  thumbing  through 
the  several  operation  records  and  totalling  the  amounts  on  an 
adding  machine,  adding,  of  course,  the  proper  percentages  for 
burden,  in  each  case.  If  the  operation  number  is  also  the  page 
or  card  number,  reference  to  this  record,  both  for  recording 
and  cost  summaries,  is  much  easier. 

More  valuable  even  than  the  cost-finding  feature  is  the  cost 
control  afforded  by  this  record.  Carefully  kept,  it  presents  an 
accurate  picture  of  general  labor  conditions  in  the  shop.  Man 
is  shown  against  man  in  the  same  operation;  compared  with 
himself  at  different  times;  the  cost  under  day  work  is  shown 
alongside  the  piece  price,  if  the  operation  is  done  both  ways. 
All  the  fluctuations,  in  short,  are  thrown  into  sharp  relief  and 
the  manager  can  take  what  steps  appear  wise  toward  even  opera- 
tion. As  a  basis  for  motion  and  time  study,  looking  to  the 
establishment  of  standard  times  and  piece  rates,  for  example, 
this  record  is  invaluable.  And  when  an  operation  is  standard- 
ized, the  necessity  for  the  continued  operation  of  the  record 
automatically  ceases. 

FORMS  FOR  ASSEMBLING  COSTS  ON  PARTS 
AND  ON  THE  COMPLETE  PRODUCT 

"M"  0  general  form  can  be  recommended  for  the  final  cost  sum- 
mary sheet,  since  it  will  be  different  for  every  line  of  manu- 
facture. It  may  be  very  simple  or  very  complicated,  depending, 
on  the  number  of  operations  to  which  the  product  is  subjected. 
In  a  parts  business,  there  will  be  a  summary  for  each  part  and 


COST  SUMMARIES  159 


another  for  the  assembled  article.  If  there  are  sub-assemblies, 
still  a  third  summary  will  be  necessary,  for  the  final  coming- 
together  of  all  the  cost  items.  The  final  summaries  are  always 
simple,  as  the  assembly  is  usually  made  in  one  operation.  They 
merely  itemize  the  various  parts  entering  into  the  assembly, 
with  columns  for  the  number  of  parts  required  to  make  one 
assembly,  the  unit  price  or  cost  and  the  total  value.  Parts 
merchandised  are  entered  according  to  the  price  listed  on  the 
balance-of-stores  records.  Parts  manufactured  on  the  premises 
are  priced  from  the  part-cost  summary,  by  using  the  cost  of  the 
lot  which  has  been  drawn  on  for  the  assembly,  if  the  part  is  not 
one  regularly  produced.  If  the  part  is  a  standard  stock  manu- 
facture, then  it  is  probably  better  to  use  an  average  figure  for 
the  cost,  except  where  the  material  cost  is  relatively  high  and  is 
a  fluctuating  quantity. 

At  the  bottom  of  the  sheet  the  assembly  operation  is  listed 
with  space  for  the  addition  of  its  proportion  of  overhead  before 
carrying  the  total  to  the  amount  column.  Painting,  if  any,  and 
packing  or  crating  are  added  similarly,  plus  the  material  required 
in  either  case.  The  total  of  the  amount  columns  may  then  be 
found  and  is  the  cost-to-make.  To  it  is  added  the  percentage 
for  administrative  and  selling  expense  and  the  cost-to-make- 
and-sell  is  complete  (Form  LXIII). 

The  part-cost  summaries  require,  of  course,  itemizing  of  all 
the  operations  to  which  the  part  is  subjected,  then  columns  for 
the  per  cent  of  overhead  in  each  case,  the  amount  of  overhead, 
the  labor  cost  and  the  combined  labor  and  overhead  cost.  If  the 
overhead  is  computed  as  an  hourly  charge,  this  charge  will 
replace  the  percentage  and  another  column  will  be  necessary  for 
the  number  of  labor  or  machine  hours.  At  the  bottom,  the  total 
cost  of  all  the  operations  is  placed  and  the  material  cost  added, 
giving  the  grand  total  cost  of  the  part.  The  columns  may  well 
be  repeated  across  the  page  so  as  to  afford  space  for  the  entry  of 
the  cost  at  different  times.  This  facilitates  comparison.  At  the 
top  of  each  series  of  columns  the  lot  number,  quantity  in  lot  and 
order  number  on  which  it  was  executed,  are  of  course  necessary. 
Single  article  cost  summaries  are  made  in  an  identical  manner, 
with  the  exception  that  space  for  the  addition  of  accessories  or 


160 COST-KEEPING  METHODS 

fittings  may  be  necessary,  and  below,  for  the  addition  of  the 
selling  expense. 

Any  of  these  costs  fulfills  the  demands  of  the  selling  and 
executive  departments.  To  get  the  fullest  value  out  of  the  cost 
information,  however,  it  should  be  made  a  vital  factor  in  the 
shop  economy;  and  by  means  of  proper  forms  and  re-grouping 
of  the  data  which  comes  to  the  cost  department,  the  results 
should  be  given  to  all  departments  concerned,  so  that  they  may 
have  the  incentive  which  comes  from  a  realization  of  increased 
efficiency,  or  the  spur  of  a  failure  to  maintain  old  standards 
of  economy. 

Even  of  greater  value  is  it  that  this  data  be  timely  and  prompt. 
The  shop  organization  has  a  proverbially  short  memory.  If  the 
cost  department  brings  down  figures  for  analysis  weeks  or 
months  after  the  shop  is  all  through  with  the  job  and  has 
forgotten  about  it,  the  whole  matter,  instead  of  being  the  aid  it 
may  well  be,  is  a  worry  and  a  source  of  irritation. 


XIV         • 

PROVING  COST  TOTALS 
WITH  THE  BOOKS 


WHEN  a  contractor  has  finished  his  itemized  estimate  on 
a  contemplated  structure,  before  making  up  his  bid 
he  takes  the  precaution,  if  he  is  wise,  to  check  his  totals 
by  certain  over-all  figures  which  experience  has  developed  to  be 
roughly  accurate.    Thus  he  avoids  mistakes  in  detail — in  taking 
off  quantities  and  in  pricing — which,  on  the  one  hand,  might 
make  his  bid  so  low  that  he  would  lose  money  on  the  contract, 
and  on  the  other,  increase  the  total  to  the  point  where  he  would 
be  left  high  and  dry  in  the  competition. 

Similarly,  the  manufacturer  should  be  in  a  position  to  verify 
his  cost  summaries  and  know,  when  he  goes  into  a  keenly  com- 
petitive market,  that  he  is  not  fooling  himself  as  to  his  probable 
profits  when  he  makes  prices  on  the  basis  of  production  cost. 
The  way  to  get  this  check  is  to  dovetail  the  factory  accounting 
with  the  general  financial  books. 

A  good  cost  system  does  not  absolutely  require  this  proof. 
It  can  be  set  up  as  a  thing  apart  from  the  ledger  accounts,  and 
if  the  work  of  analyzing,  gathering,  tabulating  and  totalling  the 
cost  data  is  very  carefully  supervised  and  checked  at  every 
stage,  the  discrepancy  between  theoretical  and  actual  profits 
will  be  slight.  But  this  could  also  be  said  of  the  contractor's 
estimating.  To  conceive  of  its  being  done  so  painstakingly  as 
to  be  free  from  error  is  possible.  The  last  measure  of  assurance, 
however,  is  lacking,  and  the  contractor  who  would  stake  his 
reputation  and  capital  on  such  estimates,  when  the  over-all  check 
is  so  simple,  could  scarcely  be  called  a  conservative  business 
man.  So  it  is  with  factory  costs.  The  human  factor  must  always 


162 COST-KEEPING   METHODS 

be  reckoned  with  and  every  feasible  check  or  proof  applied. 
When  the  costs  are  not  required  to  close  through  the  books,  the 
tendency  is  to  be  satisfied  with  "near-enough."  Tolerance  of 
little  errors  leads  to  winking  at  larger  ones,  and  before  the 


CLASSIFYING   THE   CONTROLLING  ACCOUNTS 

Manufacturing  Accounts  Current  Liability  Accounts 

Factory  Expense  Accounts  Payable 

Materials  Notes  Payable 
Supplies 

Direct  Labor  Capital  Accounts 
Indirect  Labor  Capital  Stock  (Subdivided  Ac- 
Goods  Finished  and  in  Process  cording  to  Issues) 

Equipment 


Cost  of  Goods  Sold 
Income  from  Sales 


Reserves 
Depreciation 


Selling  Expense 

Current  Asset  Accounts  Repairs 

Accounts  Receivable  Interest 

Notes  Receivable  Retirement  of  Loans 

Cash 

Prepaid  and  Accrued  Operating 
Expense 


FIGURE  IX:  A  proper  classification  of  accounts  is  the  first  step  in  laying  out  an  accounting 
system  which  will  comprehend  the  entire  business.  The  first  group  of  accounts  is  the  one  through 
which  the  factory  costs  clear.  This  group  in  turn  closes  through  the  second  group,  where,  as  the 
Cost  of  Goods  Sold  balanced  against  the  Income  from  Sales,  less  the  Selling  Expense,  it  gives  the 
profit  or  loss  at  the  end  of  each  book-closing  period.  The  other  groups  are  self-explanatory 

management  is  perhaps  aware  of  it,  the  system  is  honeycombed 
with  inaccuracies  and  approximations,  and  its  every  indication 
is  untrustworthy  and  misleading.  Link  your  factory  account- 
ing with  your  books  if  for  no  other  reason  than  to  keep  the 
cost-finding  force  keyed  up  to  the  proper  respect  for  their 
figures. 

HOW  PRODUCTION  COSTS  CLOSE  INTO  THE  CONTROLLING 
ACCOUNTS  OF  THE  BUSINESS 

A  CCOUNTS,  in  the  scheme  contemplated,  arrange  themselves 

naturally  in  several  groups   (Figure  IX). 
The    first    group — "manufacturing    accounts" — is    the    one 
chiefly  concerned  in  proving  the  factory  costs,  and  of  these  the 
keystone  account  is  ' '  factory  expense. ' '    To  this  account  the  total 


To  help  some  shop  officials  keep  in  mind  the  fact  that  the  cost  of  a  suggested  improvement  may 

outweigh  its  value,  one  railroad  has  placed  in  every  shop  office  signs  bearing  in  large  letters  the  single 

word,  "Cost."      Such  a  policy  often  leads  to  the  development  of  devices  like  that   shown   below,  in 

which  gravity  furnishes  the  required  pressure  for  furnace  doors  being  ground  simultaneously 


By  standardizing  operation,  standardized  material  and  labor  costs  become  possible.     In  a  steel  plant 
the  one  best  way  (below),  of  polishing  nickeled  cups  was  found  after  the  two  methods  shown  at  the 
left  and  right,  above,  had  been  discarded.     Formerly,  the  polishing  part  of  the  machine  was  hori- 
zontal and  operated  by  hand.      By  turning  the  machine  "on  end,"  output  was  increased  500% 


PROVING  THE  COST  FIGURES 165 

expense  of  the  direct,  or  producing  departments,  as  footed  on 
the  respective  expense  analysis  sheets  in  any  month  or  period 
(See  Chapter  XI),  are  carried  forward  as  one  item  and  entered 
on  the  credit  side  under  the  heading  "goods  finished  and  in 
process."  The  offsetting  debits  are  obtained  from  what  is 
called  a  " charge"  or  " voucher  register,"  to  be  explained  later 
(Form  LXV),  and  consist  of  the  various  items  making  up  man- 
ufacturing expense — indirect  labor,  supplies  and  fixed  charges, 
the  bookkeeping  term  for  which  is  "prepaid  and  accrued  operat- 
ing expenses."  The  amount  of  these  which  appear  on  the 
charge  register  is  in  turn  taken;  the  indirect  labor  from  the 
"distribution  payroll"  (Form  LXIV),  which  is  simply  a  sum- 
mary of  the  payroll  collection  sheets  mentioned  in  Chapter  XII 
(Form  LIV) ;  supplies,  from  the  material  or  stores  distribution 
sheets,  also  mentioned  in  Chapter  XII  (Form  L),  or  from 
the  material-issue  slips  directly;  and  prepaid  and  accrued 
operating  expenses,  from  the  sheet  of  fixed  charges,  (Chapter 
X,  Form  XLIV) .  If  no  error  has  been  made,  this  account  will 
balance — which  is  the  proof  of  the  accuracy  of  the  expense 
analysis  sheets.  Both  the  supplies  and  the  fixed  charges  could 
be  taken  from  the  expense-analysis  sheets,  but  a  better  check  is 
afforded  by  going  back  to  the  original  records  in  each  case. 
From  the  total  of  indirect  labor  is  of  course  first  deducted  the 
amount  of  office  expense  chargeable  to  selling. 

As  for  each  debit  or  credit  entry  on  any  ledger  account,  a 
corresponding  separate  ledger  account  is  indicated,  there  will 
also  be  accounts  for  supplies,  indirect  labor  and  prepaid  and 
accrued  operating  expenses,  which  are  on  the  debit  side  of 
manufacturing  expense,  and  for  goods  finished  and  in  process, 
on  the  credit  side  of  the  same  account. 

The  amount  for  supplies  debited  to  manufacturing  expense 
will  be  on  the  credit  side  of  the  supplies  account  under  the  head- 
ing :  goods  finished  and  in  process.  The  debits  will  be  supplied 
by  the  inventory  as  of  last  date,  plus  the  additional  supplies 
purchased  during  the  month  as  shown  by  the  charge  register. 
Similarly  with  the  accounts  for  indirect  labor  and  prepaid  and 
accrued  operating  expenses.  These  take  their  debits,  the  one 
from  the  charge  register,  and  the  other  from  the  inventory, 
fixed-charges  sheet  (interest  and  depreciation  only)  and  from 


166 


COST-KEEPING   METHODS 


the  charge  register  (insurance  and  taxes  if  any  are  paid  during 
the  month).  The  indirect  labor  account,  of  course,  closes  every 
month,  as  the  same  amount  always  appears  on  both  sides.  For 


FIGURE  X:  This  chart  is  a  graphic  explanation  of  the  cost-keeping  system  of  a  large  eastern 
manufacturing  company.  Forms  used  in  collecting  labor,  material  and  expense  information  are  in- 
dicated at  the  left  by  name.  Arrows  leading  from  these  forms  into  the  charge  register  indicate  how 
costs  are  carried  into  the  general  books  of  the  company,  indicated  at  the  nght.  An  intermediate 
•tep  between  the  two,  of  course,  is  the  trial  balance  sheet.  Many  of  these  forms  are  reproduced  in 
facsimile  elsewhere  in  this  volume 

this  reason  it  is  sometimes  omitted,  and  is  necessary  only  for 
record  purposes. 

Prepaid  and  accrued  operating  expenses  should  be  subdivided 
on  the  books  into  "prepaid  and  accrued  taxes,"  "prepaid  and 
accrued  insurance/'  and  any  other  operating  expenses  that  are 
paid  in  advance.  Depreciation  and  interest,  although  included 
in  the  total  of  "fixed  charges,"  since  they  are  not  prepaid,  are 
handled  as  separate  items,  accounts  being  opened  for  each.  They 
are  therefore  brought  down  as  separate  amounts  on  the  fixed- 
charges  sheet  (See  Form  XLIV,  Chapter  X).  On  the  charge 
register  they  are  entered  in  both  debit  and  credit  columns  (under 
the  heading  of  "sundries"),  so  that  they  will  not  be  charged 
twice.  The  debits  go  forward  as  debits  to  prepaid  and  accrued 
operating  expenses,  while  the  offsetting  credits  are  posted  to  the 


PROVING  THE  COST  FIGURES 


167 


credit    side    of    reserve    for    depreciation    and    interest. 

Goods  finished  and  in  process  has  for  its  debit  the  inventory 
as  of  last  date,  the  amount  of  material  actually  applied  during 
the  month,  as  shown  by  the  stores  issued  records,  the  total  of 
manufacturing  expense,  and  the  direct  labor.  The  last  item  is 
taken  from  the  charge  register,  which  has  as  its  authority  the 
distribution  payroll,  or  from  the  latter  directly.  The  credit 
entry  is  the  "cost  of  goods  sold/'  which  is  made  up  from  the 
final  cost  cards. 

The  difference  between  the  debit  and  credit  sides  of  goods 
finished  and  in  process  represents  the  value  which  has  been 
added  to  the  material  processed  during  the  month. 

As  before,  accounts  are  also  needed  for  materials,  direct  labor, 
and  cost  of  goods  sold.  Materials  account  is  credited  with  the 


FORMS  LXIV-LXVI:  A  payroll  distribution  sheet  is  necessary  for  every  department  unless  two 
or  more  have  so  few  men  that  they  can  be  grouped  on  one  sheet.  It  is  made  up  from  time  tickets  or 
payroll  collection  sheets.  On  the  charge  register  is  recorded  all  moneys  paid  out  or  owed,  and  the 
amounts  distributed  according  to  the  various  controlling  and  trading  accounts  operated.  The  state- 
ment check  carbons  preserve  a  complete  record  of  all  moneys  paid  out 

same  amount  charged  to  goods  finished  and  in  process  and 
debited  with  the  inventory  as  of  last  date,  and  the  amount  of 
materials  purchased  during  the  current  month,  as  shown  by 


168 


COST-KEEPING   METHODS 


the  charge  register.     The  difference  is  of  course  the  inventory 
entry  for  the  ensuing  month. 

Direct  labor  account,  like  indirect  labor,  closes  each  month, 
the  same  amount  being  credited  as  debited,  from  the  total  of 


•M»ZSl«lto 


toctiptBook 


Trial  Balance,  Operating  Statement  and  Balance  Sheet 


Name  of  Account 


Operating  Apconntt 


FORMS  LXVII-LXIX:  When  accounts  are  simple  and  entries  are  kept  posted  closely,  a 
daily  financial  statement  is  possible.  In  the  trial  balance  shown,  balances  only  are  carried  forward 
to  the  other  columns — the  balance  of  the  trading  accounts  to  the  first  and  the  balance  of  the  remaining 
accounts  to  the  second.  Monthly  the  totals  in  the  receipt  book  shown  are  carried  forward  to  the 
debit  of  "cash"  and  the  credit  of  "accounts  receivable" 

the  direct  labor  payroll  for  the  month  as  shown  by  the  charge 
register. 

The    cost-of-goods-sold   account  has   for  its   dettft   the   item 
credited  under  the  samfe  nazaerto  goo'ds-finished-and-in-process. 


PROVING  THE  COST  FIGURES 169 

^ 
This  is  a  profit  and  loss  account  and  does  not  close.    It  balances 

with  the  sales  arid  selling  expense  accounts,  the  difference 
between  the  sales  and  the  sum  of  cost  of  goods  sold  plus  sell- 
ing expense  being  the  profit  (or  loss).  Both  sales  and  cost 
of  goods  sold  should  be  subdivided  on  the  books  into  as  many 
accounts  as  there  are  classes  of  goods  sold  so  as  to  show  the 
profit  on  each  line. 

Sales  account  has  only  a  credit  entry,  being  the  amount  of 
goods  sold  as  shown  by  the  ' '  sales  book, ' '  unless  goods  recorded 
as  sold  are  returned  and  the  money  refunded.  Then  it  has,  of 
course,  a  debit  for  the  amount  of  the  returns. 

Selling  expense,  too,  ordinarily  has  no  entries  on  the  credit 
side,  and  its  debits  are  taken  from  the  charge  register,  in  two 
amounts — the  direct  selling  expenses  as  advertising  and  com- 
missions, and  the  share  of  office  expense,  as  given  by  the  office 
expense  analysis  sheet. 

Before  enumerating  the  other  accounts  needed,  the  charge 
register  (Form  LXV)  may  well  be  considered  for  a  moment. 
Everything  for  which  money  is  expended  during  any  month  is 
here  recorded  and  distributed — materials  and  supplies  pur- 
chased, payroll,  taxes  and  insurance  and  other  sundry  items. 
This  makes  it  unnecessary  to  refer  to  the  purchase  orders  and 
statements  in  making  up  the  book  entries.  First  is  a  column  for 
the  line  number  for  convenience  in  reference ;  then  a  column  for 
the  day  of  the  month;  next  a  wide  column  for  the  name  of  the 
creditor  (" payroll' '  is  listed  as  a  creditor,  because  you  pay  out 
money  for  it)  ;  fourth  is  a  series  of  three  columns  under  the 
general  heading  ' '  accounts  payable, ' '  one  for  the  credit,  another 
for  the  debit  if  any,  and  a  third  for  the  date  the  bill  is  paid. 
Next  is  a  series  of  two,  three  or  more  columns  for  "materials 
and  supplies, ' '  the  separate  columns  being  for  different  kinds  of 
materials,  to  correspond  with  the  subdivision  of  the  book  account, 
and  for  supplies.  Then  follow  columns  for  direct  and  indirect 
labor,  next  one  for  selling  expense,  with  an  explanatory  column ; 
and  finally  another  series  of  three  columns  for  sundries.  One 
column  is  for  the  name  of  the  sundry  account,  the  other  two 
for  debit  and  credit  entries,  in  order  to  provide  means  for  off- 
setting the  inclusion  of  interest  and  depreciation  in  prepaid 


170 COST-KEEPING   METHODS _ 

and  accrued  operating  expenses,  as  before  explained. 

An  additional  pair  of  columns  is  sometimes  inserted  to  provide 
for  the  distribution  of  such  supplies  as  are  not  issued  on  requisi- 
tion, but  simply  charged  into  the  department  expense  as  pur- 
chased. Power-house  supplies  as  oil,  for  instance,  are  commonly 
so  handled.  One  column  is  for  the  amount,  the  other  for  the 
description. 

At  the  end  of  the  month  a  closing  line  is  drawn  below  the 
last  entry  on  the  charge  register  and  the  totals  of  the  various 
columns  found.  That  of  the  first  amount  column — accounts 
payable — becomes  the  credit  entry  to  the  current  asset  ledger 
account  by  that  name.  The  totals  of  the  remaining  amount 
columns  become  the  debits  to  the  corresponding  book  accounts — 
materials,  supplies,  direct  labor,  indirect  labor,  manufacturing 
expense,  and  selling  expense. 

Below  the  totals  another  closing  line  is  drawn  and  in  the 
space  under  this  the  various  credit  entries  to  the  same  accounts 
are  recorded.  Thus  in  the  material  column  will  be  the  amount 
of  material  actually  issued ;  in  the  supplies  column,  the  amount 
of  supplies  issued ;  and  in  the  sundries  column  the  prepaid-and- 
accrued  operating  expense  items,  also  depreciation  and  interest. 
In  the  indirect  labor  column  the  amount  of  office  expense  charge- 
able to  sales  will  be  entered  for  deduction  from  the  total,  to  give 
the  proper  debit  entry  to  manufacturing  expense  for  indirect 
labor,  while  the  same  amount  will  also  be  recorded  in  the  selling 
expense  column,  to  be  added  to  the  total  of  items  shown  on  the 
register. 

Thus  every  single  book  entry  originating  from  moneys  paid 
out  is  furnished  by  one  record — the  charge  register. 

BALANCING  THE  CURRENT  ASSET  AND  CAPITAL  ACCOUNTS 
—WORKING  OUT  THE  BALANCE  SHEET 

A  CCOUNTS  PAYABLE  takes  its  credit  from  the  charge  regis- 
"^  ter,  as  has  been  said,  while  its  debit  is  provided  by  the  cash 
book,  or  by  finding  the  total  of  the  items  noted  on  the  charge 
register  to  have  been  paid.  The  credit  balance  plus  the  amount 
brought  forward  from  the  preceding  month,  is  the  moneys  owed, 
or  quick  liability. 


PROVING  THE  COST  FIGURES 171 

''Accounts  receivable"  takes  its  credit  from  the  amount  of 
cash  received,  as  recorded  in  the  cash  or  receipt  book,  and  its 
debit  from  the  sales  book,  being  the  value  of  goods  sold.  The 
debit  balance  plus  the  amount  brought  forward  from  the  pre- 
ceding month,  is  the  moneys  due,  or  '  *  quick  assets. ' ' 

"Cash"  takes  its  credit  from  the  cash  book,  which  is  the 
same  amount  debited  to  accounts  payable,  and  its  debit  from  the 
receipt  book.  The  debit  balance  plus  the  sum  brought  forward 
represents  the  amount  of  cash  on  hand.  This  is  also  a  quick 
asset  account. 

Accounts  are  also  needed  with  "capital  stock,"  "plant  and 
equipment"  and  "surplus" — known  together  as  the  "capital 
accounts."  Although  these  play  no  direct  part  in  linking  up 
the  factory  accounting  with  the  general  books,  they  must  be 
reckoned  in  the  balance  sheet.  The  amount  of  capital  stock 
actually  issued  is  entered  on  the  credit  side  of  the  corresponding 
account,  subdivided  according  to  issues;  and  of  surplus  as 
brought  forward,  on  the  same  side  of  the  surplus  account ;  while 
the  value  of  buildings  and  equipment,  as  taken  from  the 
appraisal  corrected  to  date,  goes  on  the  debit  side  of  its  account. 

The  balance  sheet  (Form  LXIX)  is  then  made  up  from  all 
these  accounts,  both  debit  and  credit  being  taken  off.  The  two 
sides  should  of  course  balance,  which  is  the  proof  of  the  accuracy 
of  the  book  records.  The  profit  and  loss,  trading  or  operating 
accounts,  as  they  are  variously  called,  may  well  be  grouped  to- 
gether. Then  it  is  convenient  to  carry  a  set  of  debit  and  credit 
columns  alongside  the  trial  balance  columns  wherein  only  the 
differences  between  the  credit  and  debit  sides  of  the  trading 
accounts  are  set  down.  The  total  of  the  credits  subtracted  from 
the  total  of  the  debits  shows  the  profit,  as  previously  explained. 

Still  a  third  pair  of  debit  and  credit  columns  may  be  added 
on  the  same  sheet  for  the  entry  of  the  differences  only  between 
all  other  accounts  (beside  the  operating  accounts).  The  two 
sides  of  this  should  also  agree  when  the  profit  (or  loss)  just 
found  is  added  to  the  credit  (or  debit)  side. 

When  this  method  of  bookkeeping  is  followed,  payment  of 
all  bills  by  check  is  presupposed.  One  check,  for  instance, 
should  be  drawn  for  the  entire  amount  of  the  payroll  and  re- 
deposited  to  another  account  if  the  men  are  also  paid  by  checks. 


172 COST-KEEPING   METHODS 

Similarly,  the  estimated  requirements  for  petty  cash  should  be 
met  by  drawing  a  check  to  its  order,  entering  the  item  under 
sundries  on  the  charges  register  as  a  prepaid  expense  and  at 
the  end  of  the  month  deducting  the  unused  balance.  Then, 
by  another  check,  the  amount  is  brought  up  to  its  original  figure. 

If  the  statement  check  (Form  LXVI)  is  employed,  as  is  now 
very  generally  the  custom,  no  receipt  is  necessary  from  the 
payee,  and  the  duplicate  record,  totalled  page  by  page,  dispenses 
with  both  check  stubs  and  a  cash  book,  so  far  as  the  credit  entry 
to  cash  is  concerned.  A  receipt  book  (Form  LXVIII),  however, 
is  then  necessary,  to  afford  a  means  for  recording  cash  receipts. 

A  "daily  financial  statement"  (Form  LXVII),  is  another  pos- 
sibility afforded  by  this  system  of  accounting,  if  the  posting  to 
accounts  payable  and  accounts  receivable,  and  the  records  which 
furnish  the  entries  for  these,  is  kept  up  to  the  minute  as  it 
easily  may  be.  This  would  include  on  the  one  hand  a  statement 
of  the  bank  balance,  shown  for  each  bank  with  which  business 
is  done ;  and  on  the  other,  the  standing  of  the  sales — this  day, 
this  month  to  date,  and  this  year  to  date,  and  in  a  parallel 
column,  the  corresponding  sales  the  previous  year,  together  with 
the  condition  of  both  accounts  payable  and  accounts  receivable, 
and  of  notes  payable  and  notes  receivable  if  these  accounts  are 
also  carried.  By  providing  three  columns,  the  amounts  for  this 
year  and  last  can  be  shown  opposite  and  in  the  column  between, 
the  gain  in  black  and  the  loss  in  red. 

With  such  a  statement  on  his  desk  each  noon,  and  a  corre- 
sponding statement  covering  production,  the  executive  is  forti- 
fied with  a  birds-eye  view  of  his  entire  manufacturing  situation. 
It  is  his  fault,  then,  if  he  fails  to  act  on  the  evidence  presented, 
to  keep  his  entire  investment  employed  in  its  most  profitable 
directions.  And  he  may  rest  assured  that  both  the  daily  and 
the  monthly  detailed  financial  statements  are  dependable  indica- 
tions of  profitableness,  inasmuch  as  his  bookkeeping  is  rooted 
deep  down  in  his  factory  accounting,  and  through  proper  time- 
keeping, storekeeping,  purchasing  and  appraisals,  accurately, 
reflects  real  conditions. 


Part  III 

USING  COST  DATA 
TO  CONTROL  OPERATIONS 


AUTHORITIES  AND  SOURCES 
FOR  PART  III 


Chapter  XV.  Contributed  by  E.  A.  Baker,  vice-president 
and  assistant  general  manager,  Rathbone,  Sard  &  Company,  and 
formerly  president  of  Baker,  Woodman  &  Company,  efficiency 
engineers,  and  field  manager,  Miller  Franklin  &  Stevenson,  also 
efficiency  engineers;  with  additional  matter  by  J.  W.  Wiley, 
assistant  secretary,  the  Meyercord  Company. 

Chapter  XVI.  Mr.  Porter  here  describes  methods  of  stand- 
ardizing material  and  labor  costs  drawn  from  his  consulting 
work  or  investigations  in  the  plants  of  the  Hart-Parr  Company, 
Cleveland  Automatic  Machine  Company,  Kohler  Company, 
Link-Belt  Company,  Clark  Brothers,  Belmont,  N.  Y.,  and  others. 

Chapter  XVII.  Contributed  by  Mr.  Porter  in  collaboration 
with  B.  J.  W.  Sayles  of  the  Griffin  Wheel  Company.  Other 
plants  whose  practice  is  included  are  those  of  the  Hart-Parr 
Company,  Kohler  Company,  Seymour  Company,  and  Hendee 
Manufacturing  Company. 

Chapter  XVIII.  J.  A.  Purer,  naval  constructor,  contributes 
this  chapter  out  of  his  own  experience  in  both  private  shipyards 
and  those  of  the  United  States  Navy. 


I ;;-;        xv 

WHAT  COSTS  SHOULD  TELL 
THE  MANAGER 


COST  finding  methods  sometimes  seem  to  be  based  on  the 
idea  that  if  only  enough  detailed  information  can  be  gath- 
ered and  this  information  scattered  broadcast  through  the 
organization,  a  fine  crop  of  efficiency  can  be  grown.  Efficiency, 
however,  is  not  a  vegetable  to  be  grown.  It  is  a  metal  which  has 
to  be  mined  or  blasted  from  the  solid  rock  of  yesterday's  and 
today's  common  practice. 

In  operation  some  cost  methods  remind  one  of  a  ride  in  a 
merry-go-round.  They  mount  a  hobby-horse;  in  a  period  of 
dizzy  exhilaration,  figures  flit  by  in  bewildering  profusion ;  the 
music  stops  and  they  alight  exactly  where  they  started.  They 
have  not  advanced  the  factory  a  foot,  a  day  or  an  idea. 

Of  what  use  are  mere  figures?  When  asked  this  question,  an 
accountant  will  offer  to  prove  his  statistics  by  actual  inventories 
and  balances.  He  knows  his  mathematics  are  correct.  No  doubt 
they  are.  The  question,  therefore,  may  be  amplified.  Of  what 
use  are  figures  when  they  are  merely  correct  ?  Do  they  say  any- 
thing? Do  they  point  anywhere?  Do  thejr  stir  the  manager 
to  action  like  a  fire  alarm? 

Figures  must  of  course  be  correct,  but  merely  being  correct 
is  not  enough.  They  should  also  be  a  motion  picture  of  the  hap- 
penings throughout  the  plant.  This  picture  should  portray 
actual  conditions  as  they  are  today,  not  as  they  were  yesterday 
or  last  year,  and  in  such  a  manner  that  the  executive,  by  means 
of  conclusions  unmistakably  pointed,  can  get  actual,  concrete 
results. 

Cost  schemes  in  many  factories  merely  subdivide  the  total 


176  COSTS  AND  CONTROL 

outlay  among  the  various  styles,  classes  or  units  of  product. 
Costs  that  tell  the  executive  where  he  is  losing  money  and  why, 
or  that  point  definitely  to  cost-cutting,  hence  profit-increasing, 
possibilities  are  few  and  far  between.  As  has  been  indicated  in 
previous  chapters,  a  cost  system,  to  be  worthy  of  the  name,  not 
only  must  yield  figures  upon  which  reliable  estimates  can  be 
built  and  profitable  sales  prices  based,  but  it  must  also  give  close 
control  over  all  the  activities  of  the  factory. 

While  cost  systems  in  general  are  subject  to  a  number  of 
weaknesses  against  which  the  executive  must  be  on  his  guard, 
these  three  errors  in  using  cost  figures  are  of  prime  importance : 
(1)  the  use  of  an  arbitrary  or  approximate  expense  ratio,  or 
one  based  on  conditions  which  no  longer  exist;  (2)  too  much  de- 
tail in  the  periodical,  weekly  or  monthly  cost  reports  which  go 
to  the  manager;  and  (3)  the  toleration  of  a  high  cost  on  some 
favorite  article  or  operation. 

GETTING  A  SOUND  EXPENSE  RATIO  TO  APPLY 
IN  CALCULATING  COSTS 

THO  keep  track  of  current  expense  properly  and  to  distribute 
it  accurately  is  admittedly  difficult.  Accordingly  the  tend- 
ency, following  the  line  of  least  resistance,  is  to  use  whatever 
expense  ratio  is  available.  Last  year's  expense,  for  instance,  is 
frequently  employed  as  a  basis  for  figuring  this  year's  costs.  The 
result  is  not  a  cost,  but  a  guess,  and  when  it  comes  to  guessing 
the  manager  is  a  far  better  guesser  than  a  clerk,  and,  therefore,  a 
good  deal  cheaper. 

Using  even  the  current  monthly  expense  ratio  in  going  after 
sales  is  a  questionable  practice.  For  the  ratio  is  bound  to  fluctu- 
ate from  month  to  month  and  if  orders  are  taken  on  the  basis 
of  a  low  month,  when  a  high  month  comes  along  orders  taken 
at  the  same  price  will  show  a  loss  which  may  not  be  offset.  The 
cumulative  period  percentage  is  the  only  safe  one  to  follow,  and 
the  last  one  to  date  is  the  right  one  to  use  as  a  basis  for  the 
current  month's  sales.  In  a  seasonable  business,  the  period  would 
cross-section  the  situation.  Where  manufacture  is  practically 
continuous  throughout  the  year,  the  period  necessarily  would 
be  one  year. 


WHAT  COSTS  SHOULD  SHOW 177 

A  complication  arises  when  business  depressions  are  encoun- 
tered. Then  the  factory  may  operate  at  half  capacity  or  even 
under.  If  all  the  current  expense  is  charged  into  current  cost 
and  the  selling  prices  are  adjusted  accordingly,  they  will  be  so 
high  that  no  business  at  all  can  be  secured.  Either  the  price 
must  be  cut  to  a  point  where  a  fair  share  of  the  obtainable  busi- 
ness can  be  landed,  or  the  plant  closed  down  altogether.  There 
is  always  a  certain  portion  of  overhead  expense  accruing  in  a 
plant,  whether  it  is  operating  or  not.  This  expense  remains  the 
same  whether  the  volume  of  business  done  is  large  or  small ;  and 
in  times  of  business  depressions,  where  the  factory  is  not  operat- 
ing nearly  to  the  full  capacity,  it  is  unfair  to  saddle  the  individ- 
ual product  with  the  total  expense.  This  total  expense  should 
be  known  and  reported,  to  be  used  from  a  control  point  of  view, 
but  the  expense  should  be  based  upon  a  normal  production,  and 
the  difference  between  this  expense  applied  to  costs  and  the 
actual  expense  incurred  should  be  charged  against  profit  and  loss 
and  not  applied  against  sales.  In  the  same  manner,  in  excep- 
tional business  times,  when  expense  ratios  are  very  low,  costs 
should  not  be  figured  on  the  basis  of  the  actual  period  ratio,  but 
upon  the  normal  operating  basis  and  the  difference  applied  to 
profit  and  loss  account.  The  expense  ratio  is  a  measuring  stick, 
but  in  using  it  to  distribute  expenses  against  costs  for  periods 
under  consideration,  rare  business  skill  is  essential. 

So  at  all  times,  if  the  manager  wants  his  costs  to  stand  up 
and  talk  to  him,  and  talk  convincingly,  they  must  have  facts 
behind  them  and  he  must  interpret  these  facts  broadly.  Ex- 
pense facts  covering  some  forgotten  period  will  never  control 
today's  operations.  Even  today's  facts  may  not  be  used  nar- 
rowly. Use  of  costs,  no  less  than  calculation  of  costs,  is  an  art. 


CHARTING  COSTS  IN  THE  FORM 
OF  PICTURE  WRITING 


A 


S  to  the  second  weakness,  costs,  to  get  results  must  walk  up 
to  the  executive's  desk  and  tell  their  main  story  free  of  dis- 
tracting detail.  Brevity,  conciseness  and  logical  order  are  essen- 
tial Masses  of  figures  which  compel  the  executive  to  spend 
hours  in  analysis  before  he  can  reach  conclusions,  are  expensive, 
tiresome  and  soon  fail  ta  suggest  methods  of  control.  When  a 


178 COSTS  AND  CONTROL 

cost  report  bores  a  manager,  something  is  wrong  with  it.  It- 
should  'be  as  interesting  as  an  up-to-date  play.  Then  the  man- 
ager will  stay  down  at  the  office  during  the  evening  to  look  it 
over. 

If  a  private  detective  were  to  tell  a  factory  superintendent 
that  the  cost  of  finishing  "A"  grade  of  goods  increased  last 
week  about  two  hundred  per  cent  because  a  large  number  of 
men  attended  the  "world's  series "  games,  the  superintendent 
would  open  his  eyes  in  amazement.  If  a  cost  report  tells  him 
the  same  bit  of  news  in  the  same  startling  and  convincing  way, 
he  will  be  equally  attentive. 

Too  long  has  the  old  assumption  been  cherished  that  a  cost* 
report  must  necessarily  be  a  lengthy  display  of  tabulated  figures. 
Costs  are  figures,  but  their  chief  value  lies  in  their  relation  to 
other  figures.  It  is  by  comparisons  and  totals  that  managers 
form  judgments.  Yet  even  comparisons  lose  their  force  if  made 
in  too  much  detail.  In  a  certain  factory  at  one  time  more  than 
twenty  thousand  different  job  numbers  were  recorded  in  the  cost 
reports.  Final  reports,  giving  the  boiled  down  essence  of  the 
whole,  never  reached  the  manager's  desk.  If  he  desired  any 
information,  he  had  to  glean  it  tediously  from  the  voluminous 
and  intricate  records  of  twenty  thousand  jobs. 

This  is  a  mistake.  What  the  up-to-date  manufacturer  wants  is 
a  commercially  correct  cost  obtained  in  a  practical  manner. 
Such  a  cost  ne  can  use  to  advantage  in  controlling  his  business 
day  by  day.  Often  graphic  charts  (Figure  XIV)  which  por- 
tray the  fluctuation  and  trend  of  costs  in  each  department  are 
more  satisfactory  than  whole  tables  of  figures.  The  executive 
sees  instantly  whether  costs  have  gone  up  or  down,  and  why.  He 
immediately  starts  to  strengthen  the  weak  spots.  Not  until  then 
does  he  need  to  summon  the  details  which  lie  back  of  the  per- 
spective. Cost  standards  may  admittedly  be  established  by  direct 
analysis,  but  if  the  manager  has  his  cost  data  before  him  in 
proper  form  he  can  the  better  appreciate  the  weak  points  when 
they  are  brought  to  his  attention ;  more  than  that,  he  can  take 
the  lead  in  the  work  of  setting  up  cost  standards  and  no  one 
should  be  able  to  judge  so  well  as  he  the  proper  order  of  pro- 
cedure. 

Favoritism  is  the  third  weakness  in  the  use  of  costs.    There 


WHAT  COSTS  SHOULD  SHOW 


170 


is  scarcely  a  manufacturer  who  has  not  found  himself  at  one 
time  or  another  making  excuses  or  allowances  for  permitting  a 
high  cost  on  some  favorite  article  or  operation.  Pew  executives 
seem  able  to  view  their  own  business  affairs  with  the  same  calm, 


Where  Manufacturing  Becomes  Unprofitable 


FIGURE  XI:    All  quantity  manufacturing  is  based  on  selling  the  output  at  a  fixed  price.      Total 
costs,  including  fixed  charges,  labor,  material  and  expense  are  assessed  against  each  unit  of  product 
on  the  basis  of  this  price.    When  the  income  from  sales  fails  to  cover  all  such  charges,  manufactur- 
ing becomes  unprofitable,  beyond  this  point  (58%  of  output,  above)  income  becomes  profit 

open  mind  as  they  turn  upon  the  affairs  of  others.  No  purpose 
is  served  by  ignoring  positive,  proved  cost  returns.  The  part  of 
wisdom  for  the  manager  lies  in  accepting  the  discouraging  costs 
and  then  setting  about  to  remedy  tne  conditions  which  are 
responsible.  Reorganization  in  extreme  cases  is  seldom  done  by 
anyone  on  the  inside,  however.  It  requires  the  services  of  a  dis- 
interested individual  who  has  had  experience  in  this  kind  of 
work  and  who  can  give  unbiased  inspection  and  criticism  from 
the  broad  standpoint  of  improving  the  business  as  a  whole. 

Not  long  ago  an  engineer  was  talking  with  a  manufacturer 
about  his  costs.  Though  over  two  hundred  different  articles 
were  made,  costs  were  obtained  strictly  on  an  average  basis. 


180  COSTS  AND  CONTROL 


The  engineer  pointed  out  that  although  the  books  showed  a  fair 
profit  on  the  whole  volume  of  business,  undoubtedly  some  of  the 
two  hundred  articles  were  being  produced  at  a  loss.  The  manu- 
facturer replied  that  such  might  be  the  case.  The  engineer  then 
asked  him  if  it  would  not  be  a  benefit  from  the  control  point  of 
view  to  know  the  exact  cost  of  the  different  lines  produced. 

''If  I  did  know,"  was  the  answer,  "there  would  be  certain 
lines  I  could  not  sell." 

Surprised  at  this  remark,  the  engineer  asked  why  he  could  not 
sell  after  knowing  the  exact  cost. 

"Every  article  I  produce  now,  I  am  selling  at  a  profit,"  was 
the  reply;  "I  would  not  sell  goods  below  cost.  Therefore,  if  a 
cost  system  showed  me  that  certain  lines  were  costing  more  than 
I  was  getting  for  them,  I  could  not  sell  them." 

This  seems  a  strange  process  of  reasoning.  Yet  by  similar 
false  logic  there  are  many  who  deliberately  deceive  themselves. 

It  is  a  mistaken  idea  to  believe,  because  a  company  is  making 
money  in  total,  that  it  is  making  money  in  detail,  or  even  on  its 
most  profitable  lines  that  it  is  making  all  the  money  it  can.  In 
almost  every  manufacturing  plant  certain  lines  of  goods  will 
show  a  good  margin  of  profit,  while  others  will  show  little  or  none. 
Let  the  truth  be  known.  The  more  accurate  the  figures,  the  bet- 
ter the  business  may  be  controlled.  Measures  may  then  be  taken 
to  reduce  the  cost  of  the  unprofitable  lines,  so  that  the  company 
is  justified  in  continuing  to  produce  them.  If  some  lines  cannot 
be  cheapened,  then  it  becomes  a  matter  of  policy  whether  orders 
will  continue  to  be  solicited  and  accepted  for  them. 

All  this  leads  to  the  heart  of  the  whole  matter.  If  costs  are 
to  control,  they  must  be  controlled.  This  means  the  prede- 
termination of  costs  wherever  possible.  Material  costs  can  be 
controlled  by  eliminating  spoiled  work,  waste  and  other  losses, 
but  the  information  pointing  out  these  losses  must  still  come  in 
the  cost  report.  The  labor  cost  can  be  controlled  by  determining 
proper  work  standards  and  fitting  men  carefully  to  the  work. 
And  the  cost  reports  are  an  important  aid  to  this  end.  The  pro- 
portion of  expense  to  labor  can  be  controlled  if  sufficient  detailed 
information  is  provided  and  upon  this  basis  standards  of  ex- 
pense are  set. 

In  discussing  the  value  of  a  cost  system  designed  to  give  as 


Designing  a  part  for  a  new  apparatus,  when  an  old  but  forgotten  part  will  serve,  is  eliminated  by  the 
telephone  company  whose  stock  board  of  standardized  parts  is  shown  above.      The  device  in  the 
middle  made  it  possible  to  remove  burrs  from  500  gears  in  the  same  time  that  fifty   had  been  han- 
dled.   The  motor-turned  screw  driver  enables  one  girl  do  the  work  three  did  formerly 


How  expense  can  be  cut  with  a  definite  gain  in  neatness  about  the  plant  is  evident  from  these  before- 

and-after  views  taken  during  a  clean-up  campaign  in  a  Philadelphia  plant.     Standardized  expense 

and  consequent  minimum  cost  challenge  even  the  scrap  pile   as  an   instance  of  idle  investment 

which  should  be  made  productive 


WHAT  COSTS  SHOULD  SHOW 183 

large  control  as  possible  over  material  and  labor  costs  and  ex 
pense,  J.  W.  Wiley,  assistant  secretary  of  the  Meyercord  Com- 
pany, says:  "What  do  you  think  of  a  manufacturer  who  is 
satisfied  to  wait  complacently  till  the  close  of  the  fiscal  year  to 
know  the  results  of  his  operations,  as  to -profit  and  loss?  And 
assuming  that  at  the  end  of  this  period  the  balance  sheet  does 
show  a  profit,  of  what  value  is  the  information  so  far  as  being 
able  to  determine  which  products  contributed  to  the  profits  and 
which  may  have  been  responsible  for  losses  ?  Is  it  not  possible, 
and  entirely  reasonable  to  suppose,  that  certain  products  made 
handsome  profits  which  compensated  for,  or  counterbalanced  the 
loss  on  others?  The  manager  who  computes  his  monthly  profits 
or  losses  on  the  basis  of  actual  cost,  which  may  be  done  with 
amazing  accuracy,  is  on  safer  ground.  One  large  manufacturer 
through  an  adequate  cost  system  succeeded  in  calculating  his 
profits  within  a  thousand  dollars  of  the  amount  shown  by  the 
annual  audit  on  a  business  of  a  million  dollars. 

"There  are  a  good  many  reasons  for  the  lukewarm  feeling  of 
the  average  manufacturer  with  regard  to  the  subject  of  cost 
finding,  chief  of  which,  I  believe,  is  the  idea  which  seems  to  be 
prevalent  that  cost  systems  are  unnecessary  'red  tape'  and 
that  they  actually  are  operated  at  a  cost  which  exceeds  the  value 
of  the  information  they  furnish.  Such  an  idea  is  unsound  when 
a  system  is  installed  under  the  direction  of  a  person  competent 
to  distinguish  between  red  tape  and  system,  and  who  knows  the 
dividing  line  between  the  cost  of  elaborating  a  system  and  the 
value  of  the  information  made  available.  It  is  said  that  a 
banker  is  guided  as  much  in  making  a  loan  by  the  owner's  lack 
of  knowledge  of  the  condition  of  his  business  as  by  that  with 
which  he  is  familiar. 

"In  this  connection,"  concludes  Mr.  Wiley,  "just  stop  to 
consider  the  information  that  is  afforded  and  the  inestimable 
value  of  the  properly  designed  cost  system.  First, — and  most 
important — it  should  be  the  basis  of  reducing  costs.  Second,  it 
should  be  the  basis  of  establishing  correct  selling  prices  in  so 
far  as  actual  cost  and  a  certain  predetermined  percentage  of 
profit  are  concerned.  Third,  every  dollar  charged  to  the  payroll 
and  material  account  should  be  accounted  for  in  work  performed 
so  these  two  accounts  may  be  credited  and  manufactured  prc£- 


184 COSTS  AND  CONTROL 

ucts  charged.  Fourth,  it  should  be  the  basis  of  promoting  effi- 
ciency in  two  ways:  by  compulsion,  by  virtue  of  information 
made  available  as  to  workmen's  actual  relative  efficiency;  and 
by  stimulating  action  in  order  that  the  inefficiency  may  not 
come  to  the  attention  of  the  manager.  Fifth,  it  should  furnish 
the  basis  for  the  calculation  of  monthly  profits  or  losses  without 
the  necessity  of  taking  monthly  inventories." 

So  in  general  a  cost  system  can  only  produce  results  when  it 
brings  the  executive  such  comparative  information  as  enables 
him  to  standardize  and  intelligently  direct  improvement  in  his 
business.  That  is  control.  A  management  without  control  is 
helpless  and  hopeless.  Ability  to  control  future  costs  comes  in  a 
large  measure  from  a  continuous  knowledge  and  perspective  on 
past  costs,  why  they  accrue,  how  they  vary,  and  the  elements 
making  up  the  totals. 


XVI 

STANDARDIZING  MATERIAL 
AND  LABOR  COSTS 


TO  reduce  costs  if  possible,  at  any  rate  to  keep  them  from 
rising,  is  a  problem  common  to  all  manufacturers.  Some 
may  be  inclined  to  underrate  the  value  of  a  cost  system, 
but  all  are  keenly  interested  in  any  scheme  that  will  lower  the 
cost  of  production  and  increase  profits.  Convince  these  man- 
agers that  a  proper  cost  system  is  one  means,  if  not  the  most 
effective  one,  towards  this  end  and  they  are  not  slow  to  want 
the  best  that  brains  can  supply. 

Cost  systems  promote  efficiency  principally  in  two  ways — 
they  show  up  the  fluctuations  due  to  lack  of  standard  methods 
and  they  force  the  management  to  rectify  many  wrong  condi- 
tions in  order  to  get  a  cost  at  all.  The  very  fact,  too,  that  a 
close  check  is  being  maintained  on  every  item  of  expenditure 
tends  to  make  all  hands  more  thrifty.  Thus  benefits  begin  to 
accrue  even  before  the  cost  reports  reveal  to  the  manager  this 
power  of  control. 

Once  the  cost  reports  begin  to  point  unmistakably  to  weak 
spots,  however,  the  opportunity  for  more  definite  savings  arrives. 
Armed  with  comparative  figures — made  the  more  striking  per- 
haps by  portrayal  in  graphic  form — the  manager  can  require 
from  his  department  managers  an  explanation  for  this  or  that 
fluctuation.  He  can,  moreover,  rate  them  on  their  ability  to 
hold  department  expense  uniform.  Thus  in  time,  by  acting 
promptly  and  firmly  on  the  evidence  of  his  cost  reports,  he  can 
iron  out  the  most  flagrant  fluctuations.  He  may  even  be  able 
to  fix  some  standards. 

But  standards  based  on  cost  data  are  bound  to  be  tentative 


186 COSTS  AND  CONTROL 

at  best.  To  get  down  to  bedrock  it  is  really  necessary  to  supple- 
ment the  work  of  cost  analysis  with  first-hand,  scientific  investi- 
gation. To  know  that  this  month 's  or  this  day 's  cost  on  a  certain 
operation  is  higher  than  yesterday's  or  last  month's  is  useful, 
but  to  know  how  much  even  the  lowest  previous  figure  exceeds 
the  possible  limit  attainable  requires  detailed  operational  anal- 
ysis. It  means  motion  and  time  study.  It  means  taking  long 
and  definite  strides  toward  scientific,  standard  conditions  of 
work.  For  standard  costs  presuppose  standardized  operation — 
and  even  before  the  cost  system  can  begin  to  function  effectively 
as  an  instrument  of  control,  much  work  must  be  done  along  this 
line. 

A  beginning  in  setting  up  permanent  cost  standards  can,  how- 
ever, be  made  at  an  early  stage  in  the  development  of  a  cost 
system.  The  guiding  principle  is  to  isolate  as  soon  as  possible 
all  variables  in  the  cost  and  then  to  concentrate  on  ways  of 
harnessing  these  variables  to  standards.  This  principle,  it  will 
be  recalled,  governed  the  classification  of  the  elements  of  expense 
and  the  arrangement  of  items  on  the  expense-analysis  sheets. 
First  came  the  fixed  charges  and  such  other  expenses  as  could 
readily  be  predetermined  and  spread  over  the  year  uniformly. 
Then  followed  the  so-called  variables,  or  controllable  items  of 
expense. 

Typical  expense  variables  are  supervision,  indirect  labor,  sup- 
plies, power,  heat  and  light,  and  repairs.  These  are  so  obviously 
indirect  charges,  which  vary  with  plant  activity  and  efficiency  of 
operation,  that  the  place  for  them  is  perfectly  plain. 

HOW  TO  SEPARATE  STANDARD  FROM  ABNORMAL  MATERIAL 
COSTS  AND  REDUCE  SPOILAGE 

TN  this  category  it  is  legitimate  also  to  include  even  the  varia- 
tions in  the  direct  material  and  labor  costs.  First  take  material. 
This  is  a  definitely  measurable  quantity.  But  the  pounds,  feet, 
gallons  or  yards  in  the  finished  product  by  no  means  equal  the 
number  of  corresponding  units  in  the  raw  stock.  A  certain 
amount  of  material  always  and  inevitably  disappears  in  process- 
ing. Some  of  this  loss  is  unavoidable,  as  the  shrinkage  in  weight 
and  volume  of  materials  containing  moisture;  the  refuse  from 


MATERIAL  AND  LABOR  STANDARDS 


187 


188     COSTS  AND  CONTROL 

sawing,  jointing,  drilling,  turning  and  sandpapering  of  wood; 
the  chips,  filings,  shavings  and  drillings  produced  in  machining 
iron,  steel,  brass  and  other  metals;  and  the  unusable  ends  and 
soft  spots  in  leather.  These  may  be  called  normal  losses,  for 
which  allowance  should  be  made  in  the  material  price. 

But  the  loss  due  to  mistakes  and  carelessness  in  processing 
and  handling,  by  far  the  more  serious  loss  in  the  average  case, 
should  be  treated  as  an  element  of  expense.  As  early  as  possible, 
therefore,  a  distinction  should  be  drawn  between  the  manufac- 
turing loss,  which  is  normal  and  constant,  and  the  personal-equa- 
tion loss,  which  is  abnormal  and  varying.  Obviously  a  step 
is  thus  taken  in  the  direction  of  control  and  economy.  Material 
cost  is  at  once  standardized.  The  problem  of  controlling  waste 
and  spoilage  still  remains,  but  now  it  is  distinct,  as  a  matter  of 
expense.  This  arrangement,  moreover,  is  just  from  the  cost 
viewpoint.  Generally  speaking,  the  individual  job  or  lot  should 
bear  only  its  fair  share  of  the  burden  due  to  manufacturing 
errors,  regardless  of  the  direct  loss  in  its  particular  case. 

Showing  up  the  abnormal  material  loss  in  the  expense  analysis 
brings  the  matter  definitely  to  the  attention  of  the  manager.  If 
it  is  large,  he  will  want  to  know  the  reason  why.  The  pressure 
he  will  bring  to  bear  on  the  working  force  elevates  the  stand- 
ards of  workmanship.  Tracing  back  for  the  cause,  he  may  find 
imperfections  in  the  equipment,  or  in  the  manufacturing  and 
inspection  methods,  or  again,  in  the  quality  of  the  raw  materials. 
In  this  way,  many  factories  have  been  led  to  buy  on  the  basis  of 
specification  and  tests.  To  control  waste,  they  have  found  it 
necessary  first  to  control  the  quality  of  their  purchases. 

Redesigning  your  product  is  often  a  profitable  method  of 
establishing  a  standard  cost  on  material  and  labor.  A  Pacific 
Coast  maker  of  metallic  wall  cabinets  for  electrical  purposes 
found  that  a  competitor  could  sell  a  similar  kind  for  less  than 
his  own  factory  cost.  His  shop  foreman  insisted  that  he  had 
cut  everything  to  the  limit,  although  his  cost  was  $1.08  against 
the  other  fellow's  selling  price  of  $1.00.  So  the  owner  took  the 
matter  into  his  own  hands. 

Looking  first  into  the  method  of  manufacture  he  found  that 
several  men  would  take  the  flat  sheets  of  steel,  turn  up  the  sides, 
flange  the  upper  edges  for  the  fronts,  rivet  the  corners,  drill  all 


MATERIAL  AND  LABOR  STANDARDS 189 

holes  and  attach  the  hinges.  Other  men  would  make  wooden 
fronts,  glaze  the  doors,  attach  hinges  and  locks  and  mount  the 
doors.  Still  others  would  assemble  and  varnish  them.  His  first 
decision  was  to  route  work  in  such  a  way  that  each  man  had 
but  one  or  possibly  two  processes  to  handle;  the  first  turning 
up  the  sides  and  flanging  the  edges,  the  second  riveting  the  cor- 
ners, a  third  drilling  the  holes,  and  so  on.  From  the  assembler 
they  would  go  to  another  room  to  be  varnished  and  dried,  thus 
keeping  the  cabinets  away  from  the  dirt  and  insuring  better 
finish. 

Then  the  design  was  studied  and  the  method  of  making  the 
corners  was  simplified,  different  insulating  lining  adopted,  sim- 
pler hinges  and  locks  used  and  various  other  details  changed. 
According  to  the  apparent  saving,  the  cost  would  thus  be  reduced 
to  78  cents,  a  direct  saving  of  30  cents.  When  the  proposition 
was  put  to  the  foreman  he  was  dubious  but  agreed  to  try  it  out. 

The  first  lot  of  ten  cost  $6.90  and  further  modifications  in 
details  and  of  routing  work  through  reduced  the  cost  finally  to 
49  cents  each. 

STANDARDIZING  DIRECT  LABOR  COSTS— WHERE 
TO  CHARGE  PREMIUM  WAGES 

C  TANDARDIZING  the  direct  labor  cost  is  not  so  easy.  Piece 
rates  are,  of  course,  a  solution,  since  the  piece  price  on  any 
operation  can  be  taken  at  once  as  the  direct  labor  cost  of  that 
operation.  But  piece  rates  if  they  are  not  based  on  standard 
times  may  be  responsible  for  a  wide  variation  in  the  overhead 
cost  and  so  the  adjustment  may  be  a  misleading  one. 

This  points  the  necessity  of  setting  the  pieceworkers  certain 
definite  performances.  Penalizing  slow  work  by  a  lower  rate 
was  Taylor's  method  of  getting  uniform  output.  In  this  case, 
the  higher  rate  is  taken  as  the  direct  labor  cost  and  the  difference 
credited  to  expense  to  offset  the  increased  expense  cdst  due  to 
the  longer  time  taken.  Taylor  also  recommended  the  occasional 
discharge  of  a  pieceworker  for  failure  to  maintain  a  high  level 
of  earnings.  This  has  a  wholesome  moral  effect  on  the  rest  of 
the  men.  One  firm  has  attempted  to  meet  the  situation  by  pay- 
ing a  graduated  bonus  annually  for  sustained  high  earnings.  If, 
however,  pieceworkers  are  given  definite  time  limits  or  output 


190 COSTS  AND   CONTROL 

quotas  to  work  to,  and  lapses  from  these  limits  are  rigoronsly 
discountenanced,  reasonably  uniform  results  can  be  obtained 
under  straight  piece  rates. 

Bonus  and  premium  systems  furnish  a  more  difficult  account- 
ing problem.  If  the  bonus  or  premium  is  added  to  the  day- 
work  wage  in  figuring  direct  labor  costs,  a  uniform  cost  is  im- 
possible. But  when  a  bonus  or  premium  is  fixed,  a  basic  piece 
price  is  always  in  view.  Take  this  as  the  standard  and  charge 
into  expense  the  excess  earnings  of  those  who  have  failed  to 
average  the  base  price,  and  credit  expense  with  the  savings  of 
those  who  have  beaten  the  base  price.  The  ratio  of  these  two 
items  becomes  then  a  very  good  index  of  the  efficiency  of  the 
wage-payment  scheme.  By  having  it  apparent  on  the  expense 
analysis  sheets,  the  manager  is  saved  referring  to  any  other  rec- 
ord. This  arrangement  promotes  control. 

Under  straight  day  work,  standardization  of  the  labor  cost  is 
generally  considered  impossible.  Because  of  the  wide  prevalence 
of  this  opinion,  whenever  an  attempt  to  regulate  the  element  of 
cost  is  made,  day  work  is  speedily  supplanted  by  piece  rates  or 
some  other  of  the  several  so-called  incentive  plans  of  wage  pay- 
ment. In  many  cases,  however,  it  is  entirely  possible  to  stand- 
ardize the  labor  cost  while  retaining  day  work,  at  least  in  its 
outward  form.  At  the  plant  of  the  Hart-Parr  Company,  for  ex- 
ample, basic  costs  have  been  determined  on  a  great  many  of  the 
operations.  This  cost  is  placed  on  the  work  orders.  The  work- 
man then  figures  his  time  allowance  in  accordance.  Thus,  if  the 
cost  set  is  seventy-two  cents  and  a  man's  hourly  rate  is  twenty- 
four  cents,  he  knows  at  once  that  he  is  supposed  to  do  the  work 
in  three  hours.  In  the  office  an  efficiency  record  is  maintained 
on  each  man.  He  is  credited  with  the  amount  he  beats  the  cost 
estimate  on  each  job  and  debited  with  the  amount  he  exceeds  it. 
Monthly  a  balance  is  struck,  and  if  his  credits  exceed  his  debits, 
he  is  due  for  a  raise  in  his  hourly  rate.  On  the  other  hand, 
rates  are  never  reduced,  and  if  a  man  shows  by  successive  poor 
showings  that  he  has  gone  back  in  his  efficiency,  other  and 
more  suitable  work  is  found  for  him  or  he  is  let  out.  As  in  the 
case  of  the  bonus  or  premium  method  of  payment,  the  ratio 
between  the  credits  and  the  debits  to  expense,  due  to  variations 


MATERIAL  AND  LABOR  STANDARDS 191 

either  way  from  the  basic  cost,  is  a  good  index  of  the  labor 
policy. 

Almost  identically  the  same  plan  is  followed  by  the  Cleveland 
Automatic  Machine  Company.  The  only  difference  is  that  a 
time  instead  of  a  cost  limit  is  set  on  each  job,  and  the  men  are 
graded  in  percentages.  The  period  taken  is  one  month.  The 
average  per  cent  is  then  found  and  if  it  exceeds  one  hundred- 
per  cent,  the  man  is  due  for  a  raise  in  pay.  He  must  reach  at 
least  eighty  per  cent  to  hold  his  job.  Standard  production  is 
fixed  by  time  study  and  if  it  seems  too  high,  the  men  are  given 
the  opportunity  to  demonstrate  the  fact. 

WHAT  TO  DO  WITH  SET-UP  COSTS  AND  ALLOWANCES 
FOR  INADEQUATE  EQUIPMENT 

T  TNDER  any  scheme  of  wage  payment,  the  set-up  cost  remains. 
For  this  usually  a  definite  time  allowance  is  made  and  the 
workman  is  paid  either  his  hourly  rate  or  so  much  per  set-up. 
Sometimes  where  the  set-up  time  is  insignificant  compared  to 
the  total  time,  it  is  simply  ignored  or  a  small  allowance  made  for 
it  in  fixing  the  piece  rate  or  bonus.  Unless  merged  in  this  way 
with  the  operation  cost,  the  set-up  cost  should  be  charged  to 
expense,  except  on  special  short  runs  on  customers'  orders,  when 
of  course  the  amount  should  be  added  to  the  order  cost.  If  at 
the  same  time  an  entry  is  shown  for  the  interest  and  depreciation 
on  finished  or  semi-finished  stock,  the  manager  can  see  at  a  glance 
whether  merely  to  keep  down  the  proportion  of  set-up  cost  he  is 
justified  in  running  such  large  lots.  When  the  sum  of  the  two 
is  a  minimum,  evidently  the  limit  of  economy  in  the  size  of  lots 
is  indicated.  Here  again  control  results  from  the  cost 
reports. 

Another  frequent  complication  is  the  excess  cost  due  to  inade- 
quacy of  equipment.  Varying  piece  rates  are  sometimes  neces- 
sary on  the  same  operation,  when  it  is  done  on  different  machines. 
The  lowest  or  best  rate  is  the  one  to  take  as  the  direct  labor 
cost.  The  difference  between  this  rate  and  the  higher  rates  is 
a  legitimate  expense  item.  Appearing  in  the  cost  reports,  it 
makes  a  definite  impression  on  the  manager.  If  it  is  large,  he 
can  at  once  investigate  to  determine  whether  or  not  an  invest- 
ment in  new  and  up-to-date  equipment  will  be  justified.  A  de- 


192    COSTS  AND  CONTROL 

ficiency  in  the  flask  equipment  was  brought  forcibly  to  the  atten- 
tion of  one  management  in  this  manner.  Molding  of  small 
pieces  was  paid  for  according  to  the  size  of  flask.  If  the  proper 
flask  was  not  available,  the  foundry  foreman  used  the  next  larger 
size.  The  lowest  price,  however,  was  taken  as  the  cost  and  the 
excess  charged  into  molding  expense,  under  the  heading  "Ex- 
cess Labor  Cost  Due  to  Inadequacy  of  Flask  Equipment. "  Month 
after  month  this  item  ran  high.  Finally  the  management  was 
stirred  to  an  investigation  which  led  to  a  better  balancing  of 
the  entire  flask  equipment.  In  an  engine  and  sawmill  machinery 
plant,  where  considerable  apprentice  labor  was  employed,  chiefly 
because  it  was  thought  to  be  cheap,  the  excess  cost  was  shown  up 
in  the  same  manner  and  the  result  was  a  reduction  in  the  num- 
ber of  apprentices  carried,  as  well  as  the  scrapping  of  several 
old-type  machine  tools. 

Job-work  costs,  of  course,  cannot  be  standardized  to  the  same 
extent  as  regular  manufacturing.  But  the  same  principle  holds. 
The  closest  and  fairest  estimate  possible  should  be  placed  on  each 
operation,  and  the  shop  judged  in  accordance.  Excess  costs  due 
manifestly  to  shop  blunders,  poor  equipment  or  glaring  errors 
in  the  estimates  should  not  be  charged  to  the  particular  job,  but 
are  a  burden  on  the  business  as  a  whole.  Thus  each  job  receives 
only  its  fair  share  of  the  tax,  in  the  per  cent  for  overhead  which 
is  added,  and  the  excess  costs  exhibited  in  aggregate  in  the  cost 
reports  impress  the  executive  as  the  amount  on  an  individual 
order  never  could.  How  to  develop  this  method  and  build  up 
correct  estimates  on  job  work  is  described  in  a  later  chapter. 


XVII 

STANDARDIZING  EXPENSE 


WHEN  all  the  variations  in  the  labor  and  material  cost 
are  thrown  into  expense,  the  expense  ratio  or  charge 
naturally  soars.  It  has  been  known  to  double  and  even 
triple  in  cases.  To  the  manager  who  has  been  taught  that 
efficiency  is  measured  by  the  decrease  in  the  overhead,  this 
phenomenon  is  ominous.  Alarmed  beyond  convincing  to  the 
contrary,  managers  of  the  old  school  whose  plants  were  being 
systematized,  have  even  called  a  halt  in  the  proceedings,  dis- 
missed the  experts,  and  gone  back  to  their  old  ways.  Their  costs 
were  being  increased  and  no  amount  of  argument  could  persuade 
them  otherwise.  That  the  increase,  if  any,  was  only  temporary, 
and  that  before  efforts  could  be  centered  definitely  on  cost  reduc- 
tion, the  chaff  had  frankly  to  be  separated  from  the  wheat — the 
lost  motion  from  the  productive  effort — was  seemingly  beyond 
their  ken. 

Overhead  goes  up  not  only  because  in  the  effort  toward  stand- 
ardization of  the  direct  costs,  variable  after  variable  is  charged 
into  expense,  but  also  for  several  other  reasons.  For  instance, 
whole  departments  may  have  to  be  rearranged,  machines  relo- 
cated, old  machines  replaced  by  more  efficient  tools,  new  ma- 
chinery and  equipment  purchased.  All  this  shows  in  the  expense 
as  an  extra  at  first.  Then,  too,  as  machines  are  respeeded  and 
kept  more  constantly  busy,  and  as  hand  labor  is  replaced  by 
machines,  power  consumption  usually  rises.  In  one  plant  already 
mentioned,  as  a  result  of  an  improvement  propaganda,  the  power 
bill  increased  three-fold.  As  the  direct  labor  is  analyzed,  more- 
over, and  the  planning  separated  from  the  doing  and  the  wasted 


194 COSTS  AND  CONTROL 

time  from  the  productive,  the  overhead  swells  still  further.  But 
meanwhile  capacity  is  increasing  and  the  amount  of  direct  labor 
required  is  being  reduced.  If  the  volume  of  business  is  sufficient, 
total  costs  will  be  less,  even  though  the  overhead  ratio  has 
gone  up. 

HOW  TO  CHARGE  AND  CONTROL  EXPENSE  MATERIALS- 
FOUR  PRINCIPLES  TO  BE  OBSERVED 

CE  all  the  variables  have  been  segregated  and  are  regularly 
shown  as  expense  items,  moreover,  the  manager  is  in  an  ex- 
cellent position  to  exercise  control.  He  can  generally  make  large 
reductions  merely  by  going  over  the  figures  with  his  foremen. 
Ofttimes,  he  can  put  different  supervisors  on  a  comparative 
basis  on  some  one  or  more  items  and  thus  stir  up  a  healthy 
rivalry  among  them. 

C.  W.  Hart,  of  the  Hart-Parr  Company,  for  example,  draws 
up  graphs  of  the  consumption  of  such  supplies  as  cotton  waste 
(Figure  XIV).  Various  departments  are  shown  on  the  same 
sheet.  The  foreman  whose  curve  takes  a  sharp  upward  swing 
in  any  month,  is  fairly  certain  to  be  called  to  the  office  for  ex- 
planations. Incidentally  he  sees  the  curves  of  the  other  depart- 
ments and  has  the  best  ones  specifically  pointed  out.  The  result 
is  a  quiet  resolve  not  to  be  outdone  the  next  month.  The  con- 
sumption for  six  months  by  weeks  is  plotted  on  the  same  sheet. 
The  average  line  from  the  preceding  six  months  is  carried  for- 
ward and  at  the  end  of  the  period  the  new  average  drawn  parallel 
to  it.  If  the  factory  has  done  more  business  the  second  six 
months  than  the  first,  the  averages  for  the  last  period  will 
exceed  those  for  the  first.  But  the  increase  should  be  approx- 
imately equal  for  all  departments.  Those  that  are  extreme  are 
then  due  for  special  attention.  In  this  way,  the  manager  instills 
care  in  the  use  of  all  expense  materials.  On  the  more  important 
items  cost  analysis  is  followed  with  direct  investigation  and  tests. 
Thus  definite  standards  are  established.  Resultant  savings  have 
in  cases  reached  as  high  as  seventy-five  per  cent 

As  the  principles  involved  in  regulating  the  consumption  of 
any  expense  material,  these  may  be  stated:  First,  an  attitude 
of  absolute  intolerance  of  careless  and  wasteful  use  of  supplies 


STANDARDIZING  EXPENSE 


195 


shall  permeate  the  entire  organization  from  manager  down  to 
errand  boy,  but  beginning  with  the  manager.  Let  him  have  this 
feeling  and  be  supplied  with  the  proper  ammunition  by  the 
cost  reports,  and  he  will  soon  enough  find  means  of  inculcating 
the  same  feeling  in  his  subordinates.  Second,  working  condi- 
tions must  be  standardized,  in  order  to  insure  uniformity  of 
demand.  Third,  standards  of  consumption — targets  to  aim  at — 
need  to  be  determined  carefully.  Records  of  consumption,  in 
as  great  detail  as  practicable,  and  the  arrangement  of  the  data 
in  comparative  form  for  analysis,  are  the  first  steps  in  this  direc- 
tion, as  has  been  indicated.  The  mere  fact  that  such  records 
are  being  kept  in  itself  is  a  powerful  incentive  to  economy,  which 
will  show,  if  the  figures  are  plotted,  in  a  steady  downward  trend 


IBS 

250 
225 
2CO 
175 
ISO 
125 
100 
75 
50 

1 

WASTE  USED  BY  DEPARTMENTS 

IPPPPPPPPP 

WEEK  ENDING 
I     i     i     i     i     i 

«    1    f    1    1    1 

i«ii 

s 

J-  "•  -  *•  % 

u.                      Z                            «                      3E                     S 

PAST  AVERAGE 

MACHINE  SHOP 

/ 

X 

\ 

/ 

\ 

7 

\, 

/ 

\ 

/ 

S 

/ 

\ 

/ 

\ 

/ 

\ 

X1 

1 

\ 

,** 

*>s 

/ 

\ 

Kt 

•RA 

El 

I 

/ 

s 

s 

-f- 

I 

^ 

^ 

4. 

^ 

V 

S 

50 
45 
40 
35 
30 
25 
20 
15 
10 
5 
.0 

/ 

\ 

/ 

S 

s 

/ 

•^ 

\ 

>v, 

^ 

Tnni  Dflnu 

\ 

I 

/ 

/ 

\ 

1 

AV 

RA 

IUUL  Kuun 

PAST  AVERAGE 

^ 

1 

V, 

x 

FIG  TJRE  XIV:  The  rate  of  consumption  of  expense  material  is  studied  by  means  of  graphs  at 
the  Hart-Parr  tractor  plant.  Cotton  waste  is  an  important  expense  item  in  this  plant,  and  above 
are  shown  some  of  the  curves  indicating  its  consumption  by  departments.  By  means  of  these  graphs, 
relative  savings  as  large  as  seventy-five  per  cent  have  been  made.  In  the  same  way,  curves  are 
applied  to  many  other  items  as  a  means  of  showing  up  discrepancies.  The  graphic  method  "spot- 
lights" fluctuations  and  so  is  the  natural  defense  against  them 

of  the  curve  of  consumption.  After  a  time,  these  curves  will 
flatten  out.  This  indicates  that  normal  conditions  are  being 
reached. 

Fourth,  a  proper  incentive  must  be  supplied  to  enlist  the  active 
self-interest  of  both  supervisors  and  men  in  the  effort  for  eeon- 


196 COSTS  AND  CONTROL 

omy.  Merely  by  operating  an  itemized  record  of  consumption  by 
departments  so  that  a  foreman  may  be  compared  not  only  with 
himself  at  different  times,  but  with  other  responsible  heads  of 
equal  rank  at  all  times,  a  great  deal  can  be  accomplished.  Pub- 
licity of  their  relative  showings  is  also  generally  effective  in  put- 
ting supervisors  on  their  mettle.  Basing  pay  and  promotion  on 
the  improvement  they  make  is  a  further  stimulus.  But  their 
fullest  cooperation  is  seldom  secured  until  you  directly  affect 
their  pay  envelopes  each  pay  period.  The  supreme  test  of  a 
foreman  perhaps  is  his  ability  to  hold  the  department  expense 
within  reasonable  limits.  By  rewarding  him  for  creditable  rec- 
ords you  develop  his  abilities  in  this  respect  to  the  utmost.  This 
plan  also  applies  to  the  individual  workmen,  although  a  scheme 
of  compensation  which  reaches  their  self-interest  is  seldom  prac- 
ticable. To  hold  the  rank  and  file  in  line,  reliance  must  be 
placed  on  close  control  over  issuance,  definite  allowances  and 
follow-up  by  the  foremen. 

USING  COST  FIGURES  TO  CUT  DOWN  SPOILAGE 
AND  CONTROL  WASTE 

OPOILAGE  and  wasteful  use  of  applied  materials  may  be  con- 
trolled  in  much  the  same  way  as  expense  materials.  As  early 
as  possible  definite  limits  should  be  set  for  spoilage  and  avoidable 
waste,  and  every  effort  bent  to  maintain  or  beat  these  on  the 
average.  Don't  be  afraid  to  set  the  limits  too  close.  In  the  av- 
erage establishment  the  allowance  for  both  waste  and  spoilage  is 
altogether  too  large. 

A  Wisconsin  ironware  company  mentioned  elsewhere  in  dis- 
cussing quality  work,  had  been  accepting  as  normal  a  ten-per- 
cent foundry  loss.  The  president,  however,  on  a  trip  abroad, 
discovered  a  French  foundryman  who  had  reduced  his  loss  to 
two  per  cent.  Returning,  he  was  receptive  to  the  suggestion  of 
an  efficiency  expert  that  no  loss  is  normal  and  that  one  hundred 
per  cent  good  castings  was  not  too  much  to  expect.  A  bonus 
scheme  was  accordingly  inaugurated  whereby  molders  making 
a  perfect  record  any  month  received  a  bonus  of  twenty-five  per 
cent  of  their  total  monthly  earnings;  those  registering  ninety- 
nine  per  cent,  a  bonus  of  ten  per  cent;  and  ninety-eight  per 


STANDARDIZING  EXPENSE 


107 


cent,  a  bonus  of  five  per  cent.  In  addition,  those  exceeding 
ninety-five  per  cent  had  their  names  bulletined  on  an  honor  roll. 
The  cooperation  of  the  foremen  was  also  enlisted  by  paying 
them  a  percentage  of  the  bonuses  earned  by  their  men.  One  man 
hit  the  bull's-eye  the  first  month,  and  between  ten  and  fifteen 
got  public  mention. 

For  several  months,  however,  the  average  per  cent  of  loss 
remained  practically  stationary,  in  fact  increased  slightly,  if 
anything.  This  was  because  inspection  simultaneously  was  stiff- 
ened and  pieces  which  before  had  been  accepted,  only  to  require 


Casting  Defect  Code 

Defect 
Number 

Defect 

LOSS 

Defect 
Number 

Defect 

Loss 

Molder 

Company 

Holder 

Company 

Bad  Patching 

M 

22 

Pop 

M 

Bars  not  Covered 

I 

23 

Poured  Short 

M 

Blow 

M 

24 

Run  Out-at  Cope 

M 

Break  Dowr 

M 

25 

Run  Out-at  Bottom 

M 

Broken  Cores 

M 

c 

26 

Scab 

M 

Broken  Pouring  Disb 

• 

c 

27 

Shaken  Out  too  Hot 

M 

Burst  Flask 

c 

28 

Shifted  Pattern 

M 

Closed  Down  Wrong 

M 

29 

Strained 

M 

Core  Out  of  Center 

M 

30 

Strong  Facing 

M 

10 

CrackedPlate 

M 

c 

31 

Sweat 

M 

11 

Cut  Cores 

M 

c 

32 

Swollen 

M 

c 

12 

Defective  Ladle 

c 

33 

Thin 

M 

c 

13 

Dirty  and  Rough 

c 

34 

Warped 

M 

14 

Dirty  Cores 

c 

35 

Washed  Pocket 

M 

15 

Drop 

M 

36 

Wash-out 

M 

16 

Iron  Rough 

M 

c 

37 

Weak  Facing 

M 

17 

Light  Weight 

M 

38 

Wrinkled 

M 

18 

Loose  Clamps 

M 

39 

Wrong  Pattern 

M 

c 

19 

Loose  Cope 

M 

40 

Dirty  Plate 

M 

20 

Melted  Chaplets 

M 

c 

41 

Abnormal  Shrinkage 

c 

21 

No  Cores 

M 

42 

Poured  from  Wrong  Iron 

c 

FIGURE  XV:  A  complete  list  of  casting  defects  and  the  corresponding  code  numbers  is  given  on 
this  page  from  the  "Holders  Defect  Book*  used  in  the  plant  of  the  Griffin  Wheel  Company.  The 
letters  'M"  and  "C"  opposite  a  defect  indicate  whether  it  is  classified  as  a  molder's  or  the  com* 

pany's  loss 

excessive  grinding  in  the  cleaning  department  to  put  them  in 
shape  for  enamelling,  were  now  rejected.  "A  proper  casting 
should  require  practically  no  grinding"  was  adopted  as  a  stand- 
ard of  inspection.  When  a  molder  remonstrated,  he  was  told 
that  if  he  cared  to  stand  the  expense  of  excess  grinding  required, 


198 COSTS  AND   CONTROL 

his  piece  would  be  passed  without  further  question. 

The  men,  of  course,  were  given  every  opportunity  to  state 
their  case  and  many  times  the  fault  for  spoiled  work  was  shown 
to  be  beyond  their  control.  Recurrent  faults  not  due  to  the 
man  were  promptly  investigated  and  remedied  so  far  as  pos- 
sible. Defective  cores,  poor  sand,  cold  iron,  improperly  designed 
patterns  and  flasks — these  were  some  of  the  causes  revealed.  Not 
until  the  worst  of  them  had  been  corrected  was  a  real  leverage 
obtained  on  the  percentage  of  loss. 

The  Griffin  Wheel  Company,  operating  a  chain  of  foundries, 
has  been  successful  in  greatly  reducing  foundry  losses  through 
somewhat  similar  means.  Its  method,  however,  has  several  unique 
features.  A  complete  classification  of  foundry  defects  was  first 
made,  consisting  of  forty-two  separate  and  distinct  items  (Figure 
XV).  Those  due  to  the  men  are  designated  "M;"  to  the  com- 
pany, '  *  C. ' '  Each  man,  as  well  as  each  foreman,  is  provided  with 
a  copy  of  this  code.  Pieces  lost  are  reported  by  "Defect  No." 

Semi-monthly,  losses  are  tabulated,  and  as  soon  as  the  results 
are  known,  an  oblong  metal  tag,  three-and-a-half  by  five-and-a- 
half  inches,  is  hung  over  each  man 's  bench,  indicating  his  stand- 
ing for  the  period.  A  loss  of  two  per  cent  or  over  calls  for  a 
pink  tag ;  of  less  than  two  but  one  or  more,  a  green  tag ;  of  less 
than  one,  white  with  a  star  in  the  center.  A  black  tag  with  a 
gold  star  in  the  center  indicates  a  perfect  score.  Another  similar 
tag  is  hung  alongside  the  first,  upon  which  the  number  of  the 
molder's  predominating  defect  is  painted  in  black.  The  result  is 
keen  competition  among  the  men  on  the  one  hand  to  secure  a 
gold  star  and  to  keep  it  continuously  over  the  bench,  and  on 
the  other,  to  avoid  having  their  shortcomings  advertised  to  the 
shop  by  means  of  the  defect  number. 

Even  more  important  is  the  control  this  system  places  in  the 
hands  of  the  supervisors.  Without  consulting  any  records,  or 
burdening  their  minds  with  a  knowledge  of  each  molder's  pecu- 
liarities, they  are  able,  merely  by  glancing  at  the  tags,  to  gage 
each  man  and  to  give  him  specific  instruction  on  the  particular 
point  where  he  is  weakest. 

The  molders  are  also  required  to  study  the  "Defect  Book'*  and 
familiarize  themselves  with  the  various  defects  and  their  reme- 
dies (Form  LXX  and  Figure  XVI).  Cash  prizes  are  awarded  to 


Company 

that  was  formerly  thrown  into  the    junk    heap.      The    expense    of    broken    windows    and   other 

damage  caused  by  flying  pieces  was  eliminated  in  one  plant  after  the  scrap-breaking  yard  had  been 

penned  in  by  three  layers  of  expanded  metal  lath 


r  is 


-s- a 


as 
I  J 

ill 


-3  «  h 

«  «  ta 


^  c  w 
EH  es.H 


. 
III 


STANDARDIZING  EXPENSE 201 

the  molder  in  each  shop  who  makes  the  best  record  for  six  months, 
and  another  prize  for  the  man  who  excels  in  all  the  shops  taken 
together.  The  molders  are  paid  on  a  piece  basis  and  receive 
credit  only  for  good  pieces  when  the  fault  is  their  own.  Com- 
pany losses,  indicating  the  need  for  new  and  better  equipment 
and  appliances  and  closer  regulation  of  supplying  departments, 
are,  of  course,  followed  energetically.  Net  total  savings  made  in 
any  month  are  made  known  to  the  foundry  superintendents,  not 
in  percentages,  but  in  dollars  and  cents,  which  is  more  effective. 
The  amounts  are  bulletined  so  that  the  men,  too,  can  know  the 
results  of  their  efforts,  and  this  further  helps  to  enlist  their 
cooperation.  When,  finally,  one  shop  suffers  an  epidemic  of 
losses  due  to  one  defect,  the  solution  worked  out  is  passed  on  to 
the  other  shops  for  their  guidance.  Thus  a  number  of  levers 
are  operating  constantly  to  eliminate  defects  and  to  increase 
the  proportion  of  good  castings. 

BRINGING  INDIRECT  OR  EXPENSE  LABOR 
UNDER  CONTROL 

I NDIRECT  or  expense  labor  is  perhaps  the  most  difficult  ele- 
ment to  bring  under  standards.  As  an  item  of  expense  it 
is  in  some  degree  subject  to  the  same  methods  of  control  as 
expense  material.  A  certain  portion  classes  properly  as  a  fixed 
charge.  Of  this  nature  are  the  salaries  of  executives,  supervisors, 
inspectors  and  staff  experts,  as  well  as  clerks  when  they  are  paid 
on  a  salary  basis.  Maintenance  work  to  a  considerable  extent 
can  be  standardized  by  setting  tasks  for  routine  jobs  as  oiling, 
cleaning,  window  washing,  and  so  on,  and  by  executing  repair 
jobs  on  a  schedule  precisely  as  regular  operations  are  handled. 
Many  kinds  of  clerical  work  can  be  put  on  a  piece  or  bonus 
basis. 

Helping  labor  presents  a  somewhat  different  problem.  Some 
portions  of  it,  trucking  for  example,  may  be  handled  by  contract 
or  put  on  a  piece  or  tonnage  basis.  But  indirect  labor  in  general 
is  essentially  a  non-standardizable  proposition  and  the  supreme 
test  of  a  management  is  to  hold  this  variable  within  close  limits. 

An  interesting  solution  of  this  problem  was  evolved  in  con- 
nection with  other  reforms  already  recounted,  in  an  Eastern  brass 


202 


COSTS  AND   CONTROL 


mill.  The  proportion  of  helping  labor  had  become  a  matter  of 
serious  moment.  For  a  few  hours  each  day  many  men  were  re- 
quired to  move  trucks  from  the  casting  shops  into  the  mill,  and 
from  the  mill  in  turn  to  the  annealing  furnaces  and  to  the 
scratching  room,  and  from  the  latter  place  back  into  the  mill 


PU 

HIT 

DATE 

Ittm 

Kind  of  Casting 

Pattern    Date 

Floor 
No. 

Defect 

Recommended 
Disposition 

Authorized 
Disposition 

Loss 

Account 

No.       Cast 

Inspector 

Foundry 
Foreman 

1 

2 

3 

4 

37-  WEAK  FACING 

\   Description: 

' 

— 

10 

1 

/            s 
Cause: 

(a)N 
(b)N 
(c)N 
(d)lr 

Preventic 

(a)S 

and  burned  into  the  surface  on  either  side 

ot  using  the  proper  proportions  of  seacoal  to  sand 
ot  mixing  the  sand  and  seacoal  together  properly 
at  using  enough  facing  sand  to  cover  pattern 
on  too  hot 

n: 
ee  that  seacoal  and  sand  is  measured  in  measurin 
and  that  the  proper  proportions  of  sand  to  seacc 

ee  that  sand  and  seacoal  are  mixed  together  thorc 
before  being  riddled 
ee  that  pattern  is  well  covered  with  facing 

r-^-~_x-—  -  ,  ir=r^3\_—  ^ 

g  boxes, 
al  are  used 

ughfj 
£^r3Z: 

It. 

1 

12 

/ 

13 

14 

y 

— 

IS 

16 

17 

(b)S 
(c)S 

18 

19 

70 

83 

FORM  LXX  and  FIGURE  XVI:    Defective  castings  are  reported  on  the  form  shown,  at  the  same 
plant  (See  Figure  XV;.      Full  details  are  recorded,  and  also  the  recommended  and  authorized  dis- 
position.     Another  page  taken  from  the  Molders'  Defect  Book  is  shown  in  front.      Only  9ne  defect 
is  given  on  a  page,  and  below  it  are  brought  out  the  description,  cause  and  prevention 

again  for  final  rolling.  At  intervals,  between  times,  a*  man  or 
two  would  be  needed  at  a  roll  to  help  load  or  unload  metal. 
In  all,  some  fifty-odd  laborers  were  kept  on  hand  for  these 
desultory  duties,  and  during  more  than  half  the  day  the  ma- 


STANDARDIZING  EXPENSE 203 

jority  stood  around  in  idleness,  giving  the  entire  shop  atmos- 
phere a  lazy,  loafing  tone  which  seriously  hampered  the  devel- 
opment of  the  proper  efficiency. 

By  regrading  the  passage  ways  so  that  gravity  assisted  in  the 
direction  of  the  heaviest  loads,  and  using  shorter  and  lighter 
trucks,  the  force  of  move-men  required  was  reduced  one-half. 
An  area  outside  the  superintendent's  office  was  also  partitioned 
off,  fitted  with  benches  and  a  clerk  with  a  time-stamp  placed  in 
charge.  Here  the  surplus  helping  labor  was  gathered.  By 
means  of  an  annunciator  system,  the  clerk  was  kept  in  instant 
touch  with  the  rolls  and  other  places  in  the  plant  likely  to  need 
a  man  or  two  occasionally.  A  man  on  leaving  this  enclosure  was 
provided  with  a  card  designating  the  station  to  which  he  was  to 
report,  and  also  time-stamped.  Thus  the  foreman  requisitioning 
him  could  tell  whether  he  had  loitered  on  the  way.  As  soon  as 
he  was  done  with  him,  he  marked  the  time  on  the  card  and  sent 
him  back.  This  card  was  then  time-stamped  a  second  time  and 
if  he  had  loitered  on  the  return,  the  fact  was  immediately  appar- 
ent. By  this  means  the  floating  force  of  helpers  was  cut  to 
twelve.  These  are  kept  busy  only  part  of  the  time,  but  the 
" loafing"  is  now  "systematized"  instead  of  unregulated  and 
unregulatable,  as  before.  It  took  some  weeks  and  a  vast  amount 
of  patience  to  get  the  scheme  to  working,  as  many  of  the  helpers 
quit  rather  than  be  corralled  in  the  "bull-pen,"  as  they  called 
it.  But  the  foremen  were  for  it,  because  the  saving  showed  in 
their  departmental  expense  reports,  and  the  machine  hands,  too, 
eventually  fell  in  line  as  the  convenience  of  the  arrangement 
made  itself  felt. 

MORE  OUTPUT  SPREADS  FIXED  CHARGES  AND  REDUCES 
RATIO  OF  BURDEN 

rPHESE  items  of  expense  which  in  accounting  parlance  are 
termed  fixed  charges — depreciation,  interest,  taxes,  insur- 
ance, and  executive's  salaries — in  the  sense  that  their  ratio  to 
direct  costs  varies  inversely  with  the  volume  of  business,  are 
really  not  fixed  at  all.  But  the  ratio  can  be  standardized  to 
some  extent.  Practically  the  only  way  is  to  keep  the  shop  uni- 
formly supplied  with  work  and  increase  the  unit  output.  The 


204 COSTS  AND  CONTROL 

great  difficulty  of  controlling  the  ratio  of  fixed  charges  in  job- 
bing enterprises,  more  than  any  other  factor,  has  led  to  the 
wholesale  conversion  of  such  shops  into  stock  propositions.  More- 
over, only  a  stock  factory  plant  except  in  a  non-seasonable  line 
can  wholly  cope  with  the  problem.  It  is  to  reduce  this  ratio, 
therefore,  that  stock  manufacturers  whose  lines  are  seasonable 
are  reaching  out  after  supplementary  business,  to  keep  the  load 
on  their  factories  as  nearly  uniform  as  possible  throughout  the 
year,  and  that  even  non-continuous  industries  are  organizing 
on  a  continuous  twenty-four  hour  basis. 

To  lower  the  proportion  of  fixed  charges  has  also  been  a  main 
compelling  motive  in  the  country-wide  movement  to  increase 
labor  efficiency.  Though  the  apparent  object  has  been  to  reduce' 
labor  costs,  back  of  this  is  the  staggering  burden  of  overhead 
charges,  and  often  the  greater  saving  by  far  is  in  the  reduction 
of  the  overhead  ratio.  Indeed,  instances  exist  where  labor  costs 
have  been  increased  in  order  to  obtain  the  other  saving  and  in 
heavily-equipped  industries,  labor  is  worth  almost  any  price  in 
order  to  secure  its  full  and  effective  cooperation  in  the  program 
for  more  intensive  utilization  of  plant  and  equipment.  Ordinar- 
ily, however,  though  the  main  purpose  may  be  to  lower  the  per- 
centage of  overhead,  a  notable  saving  in  labor  costs  also  results 
in  spite  of  the  fact  that  wages  are  raised. 

So  far  as  accounting  goes,  some  standard  for  the  ratio  of  fixed 
charges  should  be  adopted  as  early  as  possible,  even  though  it 
be  a  tentative  standard,  even  a  bare  guess.  When  conditions  have 
been  standardized  and  every  other  variable  is  under  control,  the 
standard  can  be  corrected.  After  that  the  actual  ratio  should 
regularly  be  compared  with  the  ideal  ratio  thus  determined, 
and  the  general  efficiency  of  the  business  judged  in  accordance. 


XVIII 

HOW  TO  ESTIMATE 
ON  WORK 


SEVERAL  years  ago  an  old  and  well-known  ship-building 
firm  failed  disastrously.  It  had  been  one  of  the  most  pros- 
perous firms  in  this  industry  during  the  days  of  wooden 
ships.  With  the  advent  of  steel  ships,  however,  its  fortunes 
began  to  decline.  Its  plant  had  been  expanded  to  meet  the  new 
conditions.  Its  physical  location  was  ideal.  Its  labor  market 
was  the  same  as  that  of  competitors  who  are  still  in  the  business 
and  who  are  making  money.  Its  engineering  staff  and  produc- 
tion management  were  abreast  of  the  art  of  steel  ship-building. 

Why  did  this  firm  fail? 

Many  stories  are  current  of  the  remarkably  quick  bids  which 
the  company  made  on  large  repair  jobs.  Its  practice  was  to  send 
the  foremen  of  the  various  trades  on  board  a  damaged  vessel, 
or  to  a  ship  due  for  an  overhauling.  These  foremen  were  ex- 
pected to  prepare  lump-sum  estimates  for  the  work  under  their 
cognizance ;  and  they  did  so — sometimes  in  half  an  hour.  With 
these  estimates  as  a  basis,  the  firm  made  its  bids. 

This  method,  judging  from  the  former  success  of  the  firm,  was 
sufficiently  good  for  estimating  the  cost  of  the  comparatively 
simple  process  of  wooden  ship-building.  When  applied  to  the 
more  complex  construction  and  equipment  of  modern  ships,  the 
practice  of  guessing  at  the  probable  cost  of  a  job  was  undoubtedly 
one  of  the  chief  causes  for  the  failure  of  the  firm. 

Similar  methods  in  any  industry  will  lead  to  the  same  result. 
By  long  experience  the  practical  man  can,  of  course,  arrive  at 
a  point  where  he  is  capable  of  very  shrewd  guessing  as  to  the 
probable  cost  of  a  job.  But  the  concern  that  depends  entirely 


206 COSTS  AND  CONTROL 

on  its  foremen  for  making  estimates  will  certainly  lose  much 
business,  because  some  of  its  bids  are  too  high,  and  will  get 
other  business  resulting  in  loss  because  of  bids  too  low  for  profit. 
This  is  especially  true  of  jobbing  work,  because  it  is  improb- 
able that  two  pieces  of  work  of  this  kind  will  be  exactly  alike. 
A  man's  judgment  as  to  the  probable  cost  of  a  job,  unsupported 
by  analysis  of  the  work  involved  and  the  recorded  data,  is  in 
such  cases  at  the  best  only  a  fair  guess.  In  forecasting  the  cost 
of  work,  cost  standards  meet  perhaps  the  most  trying  test  in  their 
field  of  usefulness.  Cost  synthesis  is  the  test  of  cost  analysis 
and  cost  control. 

HOW  TO  ORGANIZE  AND  MAN  THE 
ESTIMATING  DEPARTMENT 

nPHE  ideal  way  to  estimate  the  cost  of  any  job  is  to  make  a 
time  study  of  the  operations  involved,  and  from  it  to  build 
up  the  total  anticipated  cost.  This  process,  in  the  case  of  goods 
that  will  be  regularly  manufactured,  is  a  comparatively  simple 
matter,  but  obviously  impracticable  when  it  comes  to  estimating 
the  cost  of  most  special  and  repair  jobs. 

Although  minute  time  studies  may  not  be  practicable  for  job- 
bing work,  estimates  which  are  far  superior  to  those  ordinarily 
made  by  the  supervisory  force  of  the  establishment,  however,  can 
be  obtained  if  estimating  is  made  the  business  of  a  special 
department. 

The  first  requisite  in  starting  such  a  department  is  to  select 
the  right  kind  of  men.  In  an  estimator,  the  following  quali- 
ties are  requisite:  adequate  education,  general  technical  knowl- 
edge of  the  work  done  in  the  establishment,  actual  working 
knowledge  of  at  least  one  trade,  good  judgment,  and  the  ability 
as  well  as  the  temperament  to  work  systematically.  The  last 
mentioned  quality  is  especially  important  where  cost  data  are 
to  be  analyzed  and  recorded  in  such  form  as  to  be  reliable  and 
readily  available  for  future  use.  Having  found  the  draftsman 
or  mechanic  with  these  qualities,  the  manager  must  still  give 
him  time  to  gain  experience. 

The  department  should  be  started  with  one  man  or,  at  the 
most,  two.  The  best  man  available  in  the  establishment  should 


ESTIMATING  ON  WORK 


207 


be  chosen,  even  if  he  comes  higher  than  the  management  feels 
it  can  pay  later  on  for  all  of  the  men  constituting  this  branch 
of  the  organization. 

First  should  be  taken  over  the  estimating  for  that  shop  or 
division  which  presents  the  least  difficulty.    If  attention  is  con- 


Flanged  joints,  making,  2-1/2",  pipe. 

Specification 

Date 

Labor 

Material 

Cloth  inserted  rubber  gasket  , 

From 
2-20-14 

mrkiner  holes  &  cuttine  Basket. 

to 

Sfitt.incr  UD  bolts. 

5-18-14 

Mftvimnm  --.    for  oraflp*j<i  work   on 

ship. 

95 

For  average  ship  conditions. 

55 

Minimum  ....   ahoD  conditions  . 

25 

Unit,a  taken  from  62  flanges   on 

various  jobs. 

Average  5  bolts  per  flange. 

FORM  LXXI:  To  start  a  unit-cost  data  file  upon  all  sorts  of  jobs,  daily  reports  are  kept  on  3x5  cards 
of  exactly  the  work  done  by  each  mechanic,  together  with  a  statement  of  the  circumstances  under 
which  it  was  performed.  If  the  storekeeper's  and  estimator's  departments  are  separately  housed, 
material  cost  cards  are  necessary.  Sometimes  estimating  may  be  made  best  on  a  weight  basis,  and 
cards  may  be  carried  for  such  estimates 

centrated  on  one  kind  of  work,  a  form  of  procedure  can  be  de- 
veloped more  quickly  which  will  serve  as  a  standard  for  the 
more  intricate  processes,  even  if  later  on  the  details  have  to  be 
adjusted  to  suit  the  needs  of  each  class  of  work. 

It  is  not  difficult  to  estimate  the  cost  of  applying  a  coat  of 
porcelain  enamel  to  a  steel  plate,  although  the  art  of  the  enam- 
eler  is  a  highly  specialized  one.  On  the  other  hand,  the  removal 
of  a  twelve-inch  gun  from  a  turret  of  a  battleship  is  an  intricate 
piece  of  work,  although  the  larger  part  of  it  is  done  by  unskilled 
labor.  The  former  job  presents  no  estimating  difficulties,  whereas 
the  latter  cannot  be  correctly  planned  and  closely  estimated  with- 
out reliable  and  comprehensive  data,  as  well  as  experience  on 
the  part  of  the  estimator. 


£08 COSTS  AND  CONTROL 

Broadly  speaking,  the  making  of  an  estimate  consists  of  plan- 
ning how  the  work  shall  be  done,  setting  down  the  operations  to 
carry  out  this  plan,  segregating  the  operations  by  departments, 
applying  the  labor  cost  to  each  operation,  applying  the  percent- 
age of  indirect  expense  to  the  direct  cost,  making  the  bill  of 
material  needed,  and  estimating  the  cost  of  the  material.  The 
estimating  department,  of  course,  obtains  many  plans  for  doing 
work  from  the  drafting-room  in  the  form  of  drawings.  Bills  of 
material  will  also  come  from  this  source  for  many  jobs.  But 
whatever  the  source,  all  of  the  steps  enumerated  must  be  taken 
sooner  or  later  in  making  a  reliable  estimate. 

ACCURATE  COST  DATA  FILES  UNDERLIE 
ACCURATE  ESTIMATES 

'"PHE  foundation  on  which  an  estimating  department  should  be 
built,  if  it  is  to  work  efficiently,  is  reliable  and  comprehensive 
cost  data.  Such  data  must  cover  the  cost  of  the  individual  oper- 
ations involved  in  doing  the  work.  The  first  thing  that  will  strike 
the  management  in  transferring  the  work  of  estimating  to  a  sep- 
arate department  is  the  paucity  of  such  unit-cost  data.  Costs 
of  jobs  as  a  whole,  although  valuable  as  a  check  on  total  estimates, 
are  of  little  use  in  building  up  the  estimate.  The  cost  records 
which  are  kept  for  accounting  and  auditing  reasons  usually  do 
not  go  into  sufficient  detail  to  serve  this  purpose,  and  are  further- 
more not  so  classified  as  to  furnish  the  information  which  the 
estimator  needs. 

Files  of  unit-cost  data  should  therefore  be  started  at  once  by 
transferring  to  the  new  department  such  meager  unit  costs  as 
may  be  found  on  hand,  for  the  work  of  the  shop  which  is  taken 
over  first.  The  estimating  department  then  sets  about  to  obtain 
additional  data  for  itself. 

This  can  be  done  in  a  number  of  ways,  the  simplest  of  which, 
and  the  one  that  will  yield  the  most  reliable  and  quickest  re- 
turns, is  elementary  time  study.  By  the  term  "elementary 
time  study, "  as  used  in  this  connection,  is  meant  keeping  an 
exact  record  of  the  work  done  by  each  workman  during  the 
day,  analyzing  a  large  number  of  such  daily  records,  and  from 
them  segregating  like  operations,  together  with  the  time  taken 
for  each  kind. 


ESTIMATING  ON   WORK 209 

For  example,  in  one  establishment  there  existed  a  particular 
scarcity  of  unit-operation  costs  for  plumbing  and  piping  work. 
For  several  months  the  leading  men  in  this  shop  were  required 
to  submit  daily  an  accurate  report  of  the  work  done  by  each 
mechanic,  together  with  a  statement  of  the  circumstance's  and 
surroundings  under  which  the  work  was  done.  These  reports 
were  checked  the  following  day  by  one  of  the  estimators,  who 
made  notes  of  any  special  circumstances  or  difficulties  which 
affected  the  facility  of  doing  the  work.  The  data  were  classified 
and  analyzed  daily.  After  a  few  months  a  very  complete  set 
of  unit-operation  costs  was  obtained. 

The  maximum,  minimum  and  average  costs  of  each  unit  were 
then  entered  on  cards.  Unit  costs  were  obtained  in  this  manner 
for  cutting  and  threading  pipes  of  all  sizes,  making  and  break- 
ing joints,  both  flanged  and  screwed,  removing  and  resetting 
plumbing  fixtures  and  valves  of  all  descriptions,  lead-lining  pip- 
ing of  all  sizes,  and  details  entering  into  plumbing  and  pipe 
fitting  work. 

From  these  unit  costs  even  a  comparatively  inexperienced 
estimator  can  build  up  a  reasonably  accurate  estimate. 

In  making  estimates  for  strictly  manufacturing  work,  espe- 
cially if  work  is  involved  which  will  have  to  be  repeated  a  great 
many  times,  such  as  would  be  the  case  in  manufacturing  a  large 
lot  of  one  kind  of  article,  a  stop  watch  time  study  should  always 
be  made.  As  a  side  issue  it  will  be  found  that  the  investiga- 
tions made  by  the  estimating  department  in  the  pursuit  of  unit- 
cost  data  are  very  useful  to  the  management  in  improving  the 
efficiency  of  production.  Such  investigations  frequently  reveal 
lost  motion  of  all  kinds,  but  especially  in  providing  materials 
and  tools  to  the  mechanics  for  doing  work  outside  of  the  shops. 

An  elementary  time  study  differs  chiefly  from  an  ordinary 
time  study  in  that  it  indicates  the  performance  which  can  be 
expected  on  a  job  under  the  existing  conditions  of  organization 
and  management.  As  it  is  the  object  of  the  estimator  to  build 
up  the  anticipated  cost  of  a  job  from  data  representing  actual 
working  conditions  in  the  plant,  time  studies  made  in  this  man- 
ner are  more  valuable  to  him  than  those  conducted  to  establish 
absolute  standards,  unless  conditions  are  first  standardized  in 
accordance  with  the  better  method. 


COSTS  AND  CONTROL 


Labor 

Material 

Tim 

Trade* 

Estim 

ata 

Quantity 

Kind 

EstC 

ost 

Shop  -C- 

TlrMk  -p,.  35  -  2"  Manga  iflindfl         •  -«> 

24 

•if) 

langthf                                                            a   .187 

4\ 

JA_ 

Braak  15  .ore*   Joint*                                •  .10 

1 

•in 

780  Iba 

24O  ft.   -  y   laud  lining  for  2^"  Bt«al 

asaaifl  •"«•  '«?•>•««  -  IB  -  nangera    a  .45 

| 

in 

tubing  -  3.2Sf  par  ft.                      a     OS 

39 

op 

L«jr  out  and  out  -  85  -  .action,   (.taal 

70 

2$"  .teal  flajiga.                                        «.05 

73 

Ml 

13  T 

4flbing=2i!j                                        a  -SO 

17 

sn 

36  Ibf. 

•^"Xl^  ataal  has.  bolt.                          a  .Ofi 

2 

JA. 

D«yA 

*„,..!    EnM.    and   aipanH35  a.fltinna     •    .70 

34 

sn 

1S_1£JL 

jf>  hax.   nut«                                                   a  .Ofi 

90 

«t  _  70  -  S^"    Manga*                                «  .65 

4-i 

PO 

aOQlifi 

Borap  br«aa  naatlnga 

Htv.  _  17  _  hand.   In  13  .aotion.      «1.40 

23 

RO 

fi  -  taa.  -  24"X2^»*f«   flong.H  .  2^" 

Lflfld   lina  _  13  .  bant   aaatiana            «.flO 

71 

40 

,3      tiiM     »*"X?i"Xl4-  flanged  -  2i-«.a5 

30 

00 

>f.k.  ,,r  _  as  .  a^f  fii«ga  joint,     a  .so 

?! 

no 

| 

00 

8hop  "D" 

InlaLLJfcierJUO 

_2i!Q. 

JO. 

C.«t  200-lba.   bnaa    (for  9-.pe«l«l 

t«a)                                                            A  .05 

in 

r/o 

Shop  "IB" 

ll.nt.tn.   -   0   _   ap.al.1    flMjad    tftfi*   «-4« 

ia 

60 

3  Btye 

UajiMnfl  ""^   if*"   -  7O  .    fl»n£«a        a  .20 

14 

no 

Tn^i—  r* 

3  Dayi 

I^e  _   1KB   ft.   .  2^"  plpa                           a   .15 

2S 

20 

Shcp 

•r«  _  92K  .*n  »  *o^ 

91 

36 

Shop  «U" 

Shop 

•UR«_      "il.BO   X   SCf 

2S 

90 

2    Dayi 

Qajjraaiifi  .  16fl  ft.   tubing  with  flangca  - 

Shop 

•II-  _      24,00   f      2-70f 

64 

ad 

24 

no 

•r-  .     11.95  I  50^ 

S 

SB 

Bhop  "K" 

T«tr»l    Tn^lraa* 

iaa 

(Hi 

£ig  HP  tar  •I'tlllnf  and   anlpping  In  7  - 

B1«njia                                                                  a..  BO 

5 

PO 

B^m  .  «•  -  •»/«•  h«i»«                    a  .05 

3 

?,n 

Totel  labor 

326 

15 

FORMS  LXXII  and  LXXIII:  With  detailed  information  in  hand  concerning  labor  and  material, 
gathered  from  such  cards  as  Form  LXXI,  the  actual  estimate  is  made  up  on  a  5x8  form,  both  sides 
of  which  are  shown  on  this  and  the  next  page.  It  is  printed  on  heavy  paper  and  can  be  filed 

The  unit-operation-cost  data  card  (Form  LXXI)  has  a  column 
for  cost  of  material  as  well  as  of  labor.  The  material  column  is 
not  generally  filled  out,  and  is  provided  only  for  unit  costs  where 
no  great  variation  in  the  market  price  of  material  is  likely.  The 
date  of  the  cost  entry  is  always  added,  because  revisions  of  cost 
data  must  constantly  be  made  to  keep  step  with  changes  in  the 
wage  schedule,  improved  methods  of  doing  work,  and  the  increas- 
ing efficiency  of  the  working  force. 

Unit  costs,  as  well  as  unit  times,  are  usually  recorded,  because 
the  estimator  can  compile  an  estimate  more  quickly  from  the 
former  than  from  the  latter.  The  unit  cost  is  merely  an  exten- 
sion of  the  unit  time  multiplied  by  the  rate  of  pay  of  the  mechanic 
or  gang  doing  the  work.  A  brief  note,  giving  the  source  from 
which  the  estimate  was  obtained — the  previous  job,  time  study, 
or  route  sheet  data — is  entered  when  possible,  as  this  information 
is  very  valuable  in  connection  with  the  investigation  of  costs 
that  do  not  agree  with  the  estimates. 


ESTIMATING  ON  WORK 


211 


Ko     fifi&slQ 

Estimate                     oatB    &^  uasa*. 

SMp 

Item  No.    ,1ft                      ILattartp.O.  lat€ar  0<»*^**  £3=1314 

1.  O.No 

7  TTWordinff 

P«plada  ahoyt  188  11 

^   of  2"  anrawad  and  flanged  iron  pipar  forming-part  of 

•m,   by  ft.1/2*  laad  14n«d  ataal  tnbl«4  *fl   foUowai- 

Branoh  anpnlying  oa 

ptain'a  and  axaautiva  offiaar'a  bathroom,  _hat»aan_ 

ondar  berth  daok,   port  aide  ,, 

,Branoh  aupplylng  wa 

rdroom  an«J  warrant  ^ffiaara1   batha  and  wataraloaata,,. 

•th  dao^cB,   port  and  alaxhflAHi  aidaa 

lei  patty  offioar^  waahroon  on  the  barth  daeV,  part  alda 

Branoh  ta   }«»  nanhina   on  atarboa^rd  aide 

Estimate 

labor"          4*a«-  oo 

Indirect            188.00 

Material         JWhW 

Tnta,             1715.00 

Time    15  Days 

Estimated  by        Cheeked  by 

Inside  Superintendent  Material  Schedule         Imtoxttf 

vertically  like  a  card.     Grouping  the  estimate  on  a  single  sheet  simplifies  future  reference.     Even  if 

a  few  estimates  exceed  the  space  available,  pasters  may  readily  be  added  to  the  back.      However, 

if  the  majority  of  the  jobs  handled  are  extensive,  a  larger  form  is  to  be  preferred 

If  work  is  done  in  the  establishment  under  a  piecework  or 
premium  system,  a  copy  of  the  schedule  will  of  course  be  filed  in 
the  estimating  department. 

If  the  storekeeper's  records  are  kept  in  the  same  general  office 
in  which  the  estimating  department  is  housed,  it  may  be  possible 
to  get  along  without  special  material  cost  files.  If,  however,  the 
two  offices  are  not  practically  adjacent,  it  will  be  found  in  the 
interests  of  efficiency  in  the  long  run  to  provide  separate  ma- 
terial cost  files  for  the  estimating  section.  For  the  purpose  of 
estimating,  material  costs  can  be  kept  satisfactorily  on  3x5  cards. 
These  costs  of  course  must  be  revised  frequently  to  keep  up  with 
the  prices  of  material  carried  in  stock.  If  a  large  job  is  being 
estimated,  involving  the  use  of  a  considerable  quantity  of  material 
which  will  have  to  be  purchased  especially  for  the  job,  specific 
quotations  obviously  should  be  obtained  from  sources. 

Many  estimates  can  best  be  made  on  the  weight  basis.  A  file 
should  therefore  be  kept  of  the  weight  not  only  of  standard  com- 


212 COSTS  AND  CONTROL 

mercial  materials  used  in  the  plant,  but  also  of  any  fittings  and 
specialties  which  the  establishment  uses  frequently.  A  3x5  card 
will  be  found  convenient  for  this  purpose. 

The  size  of  the  estimate*  sheet  will  depend  largely  on  the 
nature  of  the  work  done  by  the  establishment.  The  size  should 
usually  be  kept  as  small  as  is  consistent  with  the  use  of  a  single 
sheet  for  a  single  estimate.  A  5x8  form  isliandy  (Forms  LXXII 
and  LXXIII).  Grouping  the  estimate  on  a  single  sheet  of  heavy 
paper  simplifies  future  reference.  If  the  estimator  wishes  to 
consult  a  previous  estimate,  he  needs  to  take  from  the  files  only 
the  one  sheet.  Even  if  a  few  estimates  exceed  the  space  avail- 
able on  this  form,  pasters  can  readily  be  added  to  the  back. 
However,  if  most  of  the  jobs  are  extensive,  a  larger  form,  either 
of  letter  or  cap  size,  may  better  suit  the  purpose. 

SUCCESSIVE  STEPS  TO  BE  TAKEN  IN  MAKING 
THE  ESTIMATE 

IN  order  to  bring  out  more  clearly  the  step-by-step  process 
which  is  followed  in  making  an  estimate,  an  actual  example  is 
offered  (Form  LXXIII).  The  job  consisted  of  replacing  by  lead- 
lined  tubing  a  worn-out  portion  of  piping  which  formed  part  of 
the  flushing  system  of  a  vessel. 

First  of  all  the  estimator  traces  the  run  of  piping  to  be  re- 
placed. In  doing  this  he  makes  notes  of  all  the  flanges  and  joints 
that  have  to  be  "Broken  in  order  to  remove  the  old  pipe,  of  the 
lengths  of  new  pipe  to  be  fitted,  of  the  new  or  larger  holes  that 
have  to  be  cut  in  bulkheads  and  decks,  and  of  the  new  fittings 
that  have  to  be  made.  These  data  he  records  chiefly  in  the  form 
of  rough  sketches.  Notes  are  also  made  of  the  conditions  under 
which  the  work  on  the  ship  must  be  done,  as  a  guide  in  selecting 
the  appropriate  unit  cost  from  the  range  of  costs  for  each  opera- 
tion. Next,  the  estimator  sifts  out  of  these  notes  the  work  that 
has  to  be  done  by  each  shop,  and  enters  the  items  in  blank  in  the 
labor  column  on  the  reverse  side  of  the  estimate  sheet  (Form 
LXXII).  He  then  consults  the  unit-cost  data  file  and  applies 
appropriate  unit  costs  to  the  operations. 

To  go  further  into  details,  take  the  operation  of  making  up  the 
pipe  flanges  on  this  job.  The  estimator's  notes  show  that  there 


ESTIMATING  ON  WORK 


213 


are  thirty-five  two-and-one-half-inch  flanges  to  make  up,  six  of 
which  are  located  among  other  pipes  and  are  therefore  not  read- 
ily accessible.  The  remaining  twenty-nine  are  noted  as  having 
average  surroundings.  Turning  to  the  unit-cost  data  file  he 


w*                                  Master  Route  Sheet                  ™» 

i  a 

lr)rf«fJrt 

R«t>I*ot  I"  iron  pip«  of  flushing  qr«t»a  67  a.i/2"  »t»»l  toblat 

M  outlin«d  IB  d»t*ll  in  Section  I  belo* 

PUn  Ma 

Data  to  Start 

Date  to  Completa 

ApprovM 
Supvfntwmint 

Complatotf 

*3T 

**• 

Shop 

Date  to 
Start 

Oat.  to 

Complete 

Eapiafi*  •**irt  If**  f\-  ""ify  jniija'3'iir.ii  'o^uTII  iecucipin-tonBing 

ji&rt  af  iha  LLaihiajjyalflJa    by  a>i/y  \Md  liaed  el«ftl  *uh<»«  «»  fjjiiow«i 

aleaata,    an  tUfl  gUB  ftJld  tftrth   dftOtt,   part  aai  fllartOATd  side*. 

•fe«    h       ml        1<« 

FORM  LXXIV:   When  the  job  is  authorized,  a  master-route  sheet  is  prepared,  and  a  copy  is  sent  to 

«ach  department  concerned.    This  form  carries  spaces  not  only  for  the  "date  to  start,    and    date  to 

complete."  for  the  entire  job,  but  also  for  the  starting  and  finishing  dates  for  every  operation 

takes  out  the  card  (Form  LXXI)  for  "Flanged  Joints,  making 
two-and-one-half-inch  pipe."  The  method  of  obtaining  the  unit 
costs  given  on  this  card  has  been  explained. 

Three  units  are  given  in  this  case.  This  is  because  the  cost  of 
making  up  a  pipe  joint  varies  considerably,  depending  on  its 
location.  If  the  pipe-fitter  must  work  in  a  cramped  space  in  a 
nest  of  other  pipes,  the  cost  will  naturally  be  much  higher  than 
if  the  work  is  in  the  open.  The  latter  cost  will  again  be  higher 
than  making  up  a  joint  at  a  bench  in  the  shop.  There  are  few 
operations  which  are  so  affected  by  conditions  as  are  those  in- 
volved in  installing  pipe.  Many  of  the  unit  data  cards  for  other 
trades  will  contain  only  one  entry.  In  this  case  the  estimator 
applies  an  average  estimate  of  sixty  cents  per  flange  to  this  oper- 
ation. 


COSTS  AND  CONTROL 


In  case  the  work  involved  in  performing  an  operation  is  not 
clear-cut,  the  estimator  must  use  judgment  in  selecting  a  unit 
rate  between  the  maximum  and  minimum  to  fit  the  conditions. 
Actual  experience  at  the  trade  is  of  course  valuable  to  the  esti- 
mator in  such  cases,  but  is  not  essential  if  the  unit-cost  data  are 
comprehensive  and  reliable. 

Repair  work  of  this  kind  always,  however,  presents  some  un- 
certainties to  the  estimator.  In  doing  this  particular  job,  for 
example,  a  number  of  flanges  may  be  found  with  badly  corroded 
bolts  which  cannot  be  backed  out  readily,  or  which  may  even 


teooo 


.April 


FIGURE  XVII:     How  closely  the  estimate  and  actual  costs  check  in  one  instance  where  the  method 

of  figuring  described  was  used,  is  here  graphically  shown.     Between  actual  and  estimated  costs  there 

was  a  total  difference  for  the  entire  year  of  only  slightly  over  one  per  cent 

have  to  be  drilled  out.  A  few  such  unforeseen  difficulties  may 
be  the  cause  of  excessive  costs  on  several  operations.  The  method 
by  which  the  unit-cost  data  was  obtained,  and  the  averaging 
effect  of  estimating  by  operations  do  much  to  iron  out  such 
irregularities. 

There  is,  of  course,  less  uncertainty  in  the  case  of  strictly 
shop  processes.  For  example,  expanding  the  pipe  ends  into  the 
seventy  flanges  is  a  perfectly  definite  operation,  the  cost  of  which 
will  deviate  only  because  of  some  quite  unusual  contingency, 
or  because  the  mechanic's  output  differs  from  that  on  which  the 
estimate  was  based. 

It  will  be  noted  that  the  cost  of  galvanizing  the  pipe  is 
estimated  on  the  weight  basis.  In  the  same  manner  the  cost  of 


ESTIMATING  ON  WORK 215 

the  special  tee  castings  is  estimated  on  the  per  pound  basis.  The 
weights  of  both  these  items  are  quickly  taken  from  the  weight 
data  file  already  mentioned.  The  weight  data  file  is  invalu- 
able to  the  estimator ;  he  uses  it  constantly,  not  only  for  estimat- 
ing the  cost  of  labor  but  also  for  arriving  at  material  costs. 

The  estimator  sets  down  the  material  needed  under  the  ma- 
terial column  (Form  LXXII).  After  having  completed  the 
list,  he  consults  the  material  cost  files.  If  none  of  the  items  are 
in  excess  of  quantities  ordinarily  carried  in  stock,  a  special  quo- 
tation need  not  be  obtained  from  the  trade. 

Next  the  labor  estimate  under  each  shop  is  summarized  and  the 
indirect  expense  percentage  for  that  shop  applied  to  it.  The 
form  which  the  estimate  for  indirect  expense  takes  is  evidently 
dependent  on  the  cost  system  used  by  the  establishment.  In  any 
case  this  part  of  the  estimate  is  simple,  so  long  as  trustworthy 
estimates  have  been  made  of  the  direct  expense  for  labor  and 
material. 

The  total  estimates  for  labor,  material,  and  indirect  charges 
are  now  summarized  on  the  front  of  the  sheet  (Form  LXXIII). 
A  summary  of  the  job  is  typewritten  in  the  same  place,  in  the 
front  of  the  sheet,  as  will  be  noted. 

After  the  estimate  has  served  its  purpose  it  is  returned  to  the 
estimating  department,  and  is  indexed  on  3x5  reference  cards. 
Old  estimates  are  frequently  referred  to  for  the  purpose  of 
checking  new  estimates.  By  glancing  through  an  old  estimate, 
even  if  it  is  not  directly  applicable  to  the  work  in  hand,  the 
estimator  often  avoids  overlooking  some  operation,  or  some 
incidental  shop  work  which  is  not  altogether  obvious. 

When  analyzing  the  notes  and  segregating  the  work  by  shops, 
the  estimator  makes  out  a  route  sheet,  giving  in  summarized  form 
the  work  to  be  done  by  each  department  in  carrying  out  this  job. 
The  master  route  sheet  is  shown  in  Form  LXXIV.  When  the 
job  is  authorized,  a  copy  of  this  sheet  is  sent  to  each  department 
having  work  to  do  on  the  job;  and  thus  the  work  is  routed  as 
planned  by  the  estimator.  The  production  clerk  who  prepares 
the  instructions  to  the  shop  for  doing  the  work  can  do  so  only 
after  thoroughly  familiarizing  himself  with  the  job  and  planning 
how  it  shall  be  done.  This  the  estimator  has  to  do  in  order  to 
make  the  estimate.  It  therefore  saves  time  and  money  to  have 


216 COSTS  AND  CONTROL 

this  man  simultaneously  prepare  also  the  instructions  for  the 
guidance  of  the  shops. 

The  actual  cost  of  every  completed  job,  summarized  by  shops, 
is  sent  to  the  estimating  department,  and  is  compared  with  the 
estimated  cost.  These  comparisons  not  only  serve  to  check  up 
the  accuracy  of  the  estimators,  but  frequently  bring  to  light 
errors  in  cost  keeping  and  inefficiency  or  carelessness  in  the 
shops. 

A  monthly  report  is  made  of  the  percentage  variation  of  the 
estimated  costs  from  the  actual  costs.  This  comparison  is  also 
made  separately  for  the  work  of  each  estimator,  and  is  a  reason- 
ably fair  measure  of  the  estimator's  efficiency.  Disagreement 
between  estimated  costs  and  actual  costs  may,  of  course,  be  due 
to  either  one  of  two  causes  or  both  combined ;  namely,  inaccurate 
data  and  estimating  or  failure  on  the  part  of  the  operating 
departments  to  duplicate  the  output  indicated  by  the  unit  costs 
in  making  the  estimate. 

The  comparison  of  the  estimated  and  actual  costs  is  also  re- 
corded graphically  (Figure  XVII).  Despite  apparent  fluctua- 
tions due  to  charging  jobs  into  the  months  when  completed,  the 
total  of  actual  production  costs  in  this  case  differed  from  the  total 
estimated  costs  for  twelve  months  by  only  slightly  over  one  per 
cent.  Such  a  result  is  a  shrewd  test  of  the  entire  production  and 
cost  system,  and  indicates  standard  conditions  interpreted  in 
sound  operation  data. 


INDEX 


Amortization 


118 


B 


Baker,  E.  A.  174 
Bead  rack,  for  controlling  production  08 
Betterment  orders,  method  of  handling  79 
Birdseye,  W.  100 
Blackboards,  for  stock  records 
Blueprints  40 
Bonus  plans,  in  relation  to  cost  account- 
By-products,  in  relation  to  cost  account- 
ing 142 


CALENDAR 

— of  production  26 

— of  working  days  28 

Capacity,  scientific  determination  of 

Card  system,  for  scheduling,  illustration     19 

Charge  register,  in  cost  accounting  169 

Cincinnati  Shaper  Company  10 

Clark  Brothers   Company  10,  174 

Classification  of  factory  work  54 

Clearance  house  93 

Clearance  sheet  94 

COST  ACCOUNTING 

— as  means  to  control  waste  188 

— checks  on  151 

— classification  of  accounts  162 

— combining  direct  and  indirect  costs, 

diagram  of  system  in  use  166 
— distribution  of  fixed  charges 
— division  of  items  153 
— division  of  plant  operations  152 
— expense   standardization    and   con- 
trol                                       126,  193,  194 
— illustration  of  equipment  146 
— in  relation  to  bonus  and  premium 

systems  189 
— in  times  of  depression 

— main  errors  in  176 
— material  and  labor  costs 
— means  of  control 

— mechanical  aids  127 

— of  single  lots  156 

— operation  cost  determination  158 

— promoting  efficiency  through  185 

— proofs  for  figures  in  161 

— set-up  costs  190 

—standards  186 
— summaries 

— use  of  charts  177 

Cost  blanks,  for  maintenance  orders  80 

Cost  records,  forms                       153,  154,  157 
COSTS 
— analysis  of 

— estimation  of  206 

— in  relation  to  profits  179 
— in  relation  to  quantity  of  output          50 
COST   SYSTEMS 

— classification  of  items  104 

•—common  mistakes  101 


— fallacy  of  viewing  as  an  expense          104 

— importance  of  fixed  charges 

— map  of  expenditures 

— necessity  for 

— personal  factors  involved 

— physical  valuations 

— handling  of  repairs  1*0 


Daily,  Robert 
Daily  time  slip 
Defects,  records  for 
Dennis.  Stanley  A. 
DEPRECIATION 

— how  figured 

— inventories 

— minimum 

—percentages  for  classes  of  property 

— renewals 

— salvage  value 

— sinking  fund  for 

— what  to  include 
Diemer,     Hugo 

Dies,  methods  for  reducing  the  cost  of 
Diminishing  values  method,  for  deter- 
mining depreciation 
DISTRIBUTION 

— of  expense 

— of  fixed  charges 

— of  supplies,  forms  in  use 

—of  tasks 
DRAFTING 

— for  special  orders 

— standardization  of  methods 

— use  of  symbols 
DRAWINGS 

— avoiding  duplication  of 

— standardization  of 


10 

34 

202 

10 

48 

116 

116 

118 

118 

117 

118 

117 

10 

40 

117 

126 

121 

147 

18 

72 
42 


Erecting  schedules 
ESTIMATING 


— comparison  with  actual  costs 

— equipment  of  department 

— forms  used  for 

— on  weight  basis 

— organization  of  department 

— personal  qualities  requisite  for 

— repair  work 

— size  of  forms  used 

— successive  steps 

— use  of  cost  data 
EXPENSE 

— classes  of 

— definition  of  term 

— principles  involved  in  control  of 

— purpose  in  compiling,  records  of 

— standardization  of 
EXPENSE   DISTRIBUTION 

— direct-labor  method 

— machine-hour  method 

— main  problems  involved  in 


81 

214,  216 
200 

210,  211 
211 
206 
206 
214 
212 
212 

208,  209 

126 
126 
194 
126 
198 


180 
185 
1SS 


INDEX 


Murphy,  Carroll  D. 


"Family  tree"  drawings 

Felt  and  Tarrant  Manufacturing  Com- 


CHARGES 

— distribution  of 

— expense  analysis  sheet 

— in  cost  accounting 

— interest  on  investment 

— main  classes  of 

— repairs 

Formulas,  for  determining  size  of  lots 
Franklin  Automobile  Company 


40 
10 

121 

123 

119 

120 

122 

120 

51 

10 


H 

Harris,  Ford  W.  10 

Hart-Parr  Company  10,    174 

Heat,  expense  distribution  183 

"Hurry"  department  84 

I 

INSPECTION 

— coordination  with  production  97 

— essentials  principles  97 

— illustrations  of  methods  109,  110 

— plan  in  use  89 

— steps  89 

Instructions,  in  made-to-stock-manufac- 
turing 46 

Interest,  in  determining  size  of  stock  48 

INVENTORIES 

— depreciation  116 

— fixing  prices  112 

— forms  for  items  115 

— in  connection  with  cost  systems  112 

— of  buildings  and  fixtures  118 

— of  materials  or  processing  116 

— pricing  of  real  estate  115 

— records  of  67 


N 


National  Cash  Register  Company,  meth- 
od of  inspection 
Numerical  classification,  in  appraisals 


10 


109 


Operational  instructions  46 
OPERATION   CARDS 

— filing  method  for  32 

— illustration  of  29 

Order  filling,  illustration  of  methods  88 
Order^  manufacturing,  putting  on  stock 

basis  57 

Output,  analysis  of  machine  work  27 

Overhead  expense,  causes  of  increase  193 


Patterns,  reducing  cost  of  40 

Payroll,  distribution  sheet  167 

Piece  lost  report  95 

Planning  boards,  illustration  of  56 

Porter,  Harry  Franklin  10,  100,  174 

Power,  expense  distribution  133 
Premium  systems,  in  connection  with 

cost  accounting  189 

Prints,  mounting  of  44 

Processing  schedules  82 
PRODUCTION 

— necessity  for  careful  analysis  of  15 

— supervision  of  21 

Production  control,  boards  for  73 

Production  records  (caps)  55,  57,  58 

— loose-leaf  system  60 


Quality  maintenance,  general  principles     88 


Jeffery,  Thomas  B.,  Company  10 

Job  file  S3 

Job  work,  in  cost  accounting  191 


Kohler  Company  10,  100,  174 


LABOR  COSTS 

— forms  for  compiling  148 

— standardization  of  188 

Labor  efficiency  record  62 

Layout,  principles  involved  45 

Listing  sheet  113 

Logan,  James  100 

Loose-leaf  production  records  60 

Lots,  determining  size  of  48 

M 

Machine  records  113 

Maintenance  orders,  method  of  handling  79 

Manufacturing  to  order,  planning  for  39 

Marking  systems,  for  equipment  111 

Material  cost  files  211 
MATERIALS 

— accounting  methods  involved  138 

— cost  accounting  for  186 
Mill  order  tag                                             80,  82 

Miller,  Franklin  and  Company  174 

Mnemonic  classification,  in  appraisals  108 

Move  cards,  illustration  of  37 

Movement,  in  determining  size  of  stocks  48 


Rathbone,  Sard  and  Company  10,  100 

RECORDS 

— advantage  of  graphic  methods  58 

—cost  153,  154,  157 

— for  special  orders  76 

— of  production  67 

—of  waste  195 

Repairs,  expense  distribution  134 

RUSH  ORDERS 

— hurry  slips  for  85 

— method  of  handling  64 

— personal  follow-up  on  84 

Rush  slips,  method  of  using  84 

s 

Sales,  chart  of  fluctuations  24 

Salvage  value,  how  estimated  117 

Sayles,  B.  J.  W.  174 
SCHEDULES 

— for  machine  erecting  25 

— of  production  58 

— readjusting  to  new  demands  53 

— the  kinds  necessary  25 
SCHEDULING 

— based  on  estimated  sales  25 

— charts  for  27 

— of  labor  value  29 
— of  number  of  men  to  be  employed  29 
— of  operations  in  single  department  32 

—of  output  26 

— of  sizes  and  styles  31 
— of  working  days 

— successive  steps  in  25 


INDEX 


Scrap  value,  as  minimum  of  deprecia- 
tion 116 
Seasonal  demands  66 
Set-up  cost,  in  determining  lot  sizes  48 
Seymour  Manufacturing  Company  10,  100 
Shipping  expense,  how  treated  in  cost 

accounting  131 

Short  call  record,  for  stock  control 
Sinking  fund  118 

Sizes,  schedules  of 

Sizes,  which  to  manufacture  first  31 

SPECIAL  ORDERS 
— follow-up  devices  for 
— forms  used  for  76 

— importance  of  maintaining  general 

schedule  86 

— on  built-up  articles 
— principles  governing 
— records  for 
— system  for  control  of 

Specifications,  forms  for  207 

Stability  in  relation  to  efficient  produc- 
tion 54 
STANDARDIZATION 
— in  cost  accounting                                  186 
— of  processes  13 
Sterling  Piano  Company                               100 
STOCK     (see  also  stores) 

—control  of  __  58-69 

— determination  of  amount  47 


— formula  for  determining  value  of  50 

— minimum  49 

— order  card  for  inspection  of  98 

Storage  capacity,  bearing  upon  erecting 

schedule  81 

Straight-line  method,  in  figuring  depre- 
ciation 117 

Styles,     which    to     manufacture     first  31 

Symbols,     use    in     drawings  44 


Tabor   Manufacturing   Company  10 

Timekeeping,  methods  144 

Tracer  system,  for  rush  orders  86 

u 

UNIT    COSTS. 

— in  determining  lot  sizes  48 

— method  of  compiling  209 

w 

WASTE 

— how  to  limit  195 

— in  relation  to  cost  accounting  140,  188 

— premium  systems  as  means  to  control  201 

— records  of  195 

Wiley,  J.  W.  100,  174 

Woods,  Clinton  E.  10 


YC  24705 


48858? 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


